Before the
FEDERAL COMMUNICATIONS COMMISSION FCC 94-285
Washington, D.C. 20554
In the Matter of )
)
Implementation of Section 309(j) )
of the Communications Act - ) PP Docket No. 93-253
Competitive Bidding )
)
FIFTH MEMORANDUM OPINION AND ORDER
Adopted: November 10, 1994 Released: November 23, 1994
By the Commission: Chairman Hundt and Commissioners Barrett and Ness issuing separate statements.
TABLE OF CONTENTS
Paragraph
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . .1-6
II. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . .7-9
III. DISCUSSION
A. Concept of Entrepreneurs' Blocks
1. Authority and Amount of Spectrum. . . . . . .10-16
2. Gross Revenues and Other Financial Caps . . .17-45
B. Designated Entity Definitions. . . . . . . . . . .46-57
C. Eligibility Requirements
1. Minimum Equity Limit for the Control Group .58-76
2. Control Issues and Management Contracts . . .77-86
3. Attribution Rules . . . . . . . . . . . . . .87-96
D. Special Provisions for Designated Entities
1. Bidding Credits . . . . . . . . . . . . . . 97-100
2. Installment Payments. . . . . . . . . . . .101-104
3. Rural Telephone Company Provisions. . . . .105-113
E. Aggregation of and Holding Period for the Entrepreneurs'
Block Licenses. . . . . . . . . . . . . . . .114-127
F. Miscellaneous. . . . . . . . . . . . . . . . . .128-137
IV. PROCEDURAL MATTERS . . . . . . . . . . . . . . . . .138-142I. INTRODUCTION
1. By this action, we resolve petitions for reconsideration or clarification of our rules
governing competitive bidding for "entrepreneurs' block" licenses in the 2 GHz band Personal
Communications Service (broadband PCS). Twenty-six petitions were received, as well as
17 oppositions and 8 replies. Specifically, in this Fifth Memorandum Opinion and Order, we
resolve issues associated with our entrepreneurs' block rules, as well as other provisions we
established to ensure that small businesses, rural telephone companies and businesses owned
by minorities and women (collectively termed "designated entities") have meaningful
opportunities to participate in the provision of broadband PCS. Our goal in this proceeding is
to ensure that designated entities have the opportunity to obtain licenses at auction as well as
the opportunity to have meaningful involvement in the management and building of our
nation's broadband PCS infrastructure. Thus, as we describe below, we make certain
modifications to our rules so that they will better serve these goals.
2. When the new broadband PCS auction rules were adopted in the Fifth Report and
Order, the Commission declared its intent to meet fully the statutory objective set forth by
Congress in Section 309(j) of the Communications Act. In particular, we observed that it was
the mandate of Congress that the Commission should "ensure that small businesses, rural
telephone companies, and businesses owned by members of minority groups and women are
given an opportunity to participate in the provision of spectrum-based services." We also
noted that Congress has directed us to "promote economic opportunity and competition and
ensure that new and innovative technologies are readily accessible to the American people by
avoiding excessive concentration of licenses and by disseminating licenses among a wide
variety of applicants." With these congressional directives in mind, we established the
entrepreneurs' blocks and designated entity provisions contained in the Fifth Report and
Order, which are now under reconsideration.
3. Although we wish to "fine-tune" some aspects of our rules, we generally conclude
that the "entrepreneurs' block" concept and the special provisions for designated entities
adopted in the Fifth Report and Order are the most efficient and effective means to fulfill our
statutory mandate to provide for a diverse and competitive broadband PCS marketplace. In
particular, we have adopted measures to ensure opportunities for meaningful participation by
minority and women-owned businesses in the emerging broadband PCS marketplace by
providing that such entities are eligible for bidding credits, installment payments, and the
benefits of tax certificates, and by adopting eligibility rules that accommodate noncontrolling
equity investment.
4. On reconsideration of the Fifth Report and Order, we weigh the recommendations
of those who have asked us to modify our rules. While we conclude that for the most part our
rules will remain unchanged, we find that some rule modifications are necessary to further
empower businesses owned by women and minorities and designated entities generally to
participate in broadband PCS. Also, our rules need to be clarified in some instances to
provide entities wishing to participate in the entrepreneurs' blocks with greater certainty and a
better understanding of what is expected of them. In general, our rule changes will grant
designated entities, particularly minority and women-owned applicants, additional flexibility in
how they raise capital and structure their businesses. Minority-owned applicants, for example,
should be able to draw more readily upon the financial resources and expertise of other
successful minority business enterprises. Our revised rules seek to accommodate the many
existing minority and women-owned firms that want to enter the PCS market, but whose
existing corporate structures do not meet the criteria for entry prescribed in the Fifth Report
and Order. Thus, experienced minority and women entrepreneurs, who are likely to succeed
in the broadband PCS marketplace, are not inadvertently barred from participating in the
entrepreneurs' block under our new rules. In sum, our revised rules permit entrepreneurs'
block applicants to structure themselves in a way that better reflects the realities of raising
capital in today's markets, and to obtain the necessary management and technical expertise for
their PCS businesses.
5. As we indicated above, a primary objective on reconsideration is to ensure that our
rules promote diversity and competition in the PCS marketplace of the future. In this regard,
we believe a special effort must be made to enable minority and women-owned enterprises to
enter, compete and ultimately succeed in the broadband PCS market. These designated entities
face the most formidable barriers to entry, foremost of which is lack of access to capital. In
our effort to provide opportunities for minorities and women to participate in PCS via the
auctions process, we strive for a careful balance. On one hand, our rules must provide
applicants with the flexibility they need to raise capital and structure their businesses to
compete once they win licenses. On the other hand, our rules must ensure that control of the
broadband PCS applicant, both as a practical and legal matter, as well as a meaningful
measure of economic benefit, remain with the designated entities our regulations are intended
to benefit.
6. After reviewing the record, we amend or clarify our entrepreneurs' block rules in
several respects. We emphasize that these changes constitute a refinement of our original
entrepreneurs' block rules adopted in the Fifth Report and Order that will further advance our
objectives of promoting competition and diversity in the broadband PCS marketplace. In
summary, we have decided to:
Modify the rules to allow certain noncontrolling investors who do not qualify for the
entrepreneurs' block or as small businesses to be investors in an applicant's control
group. Allow entities that are controlled by minorities and/or women, but that have
investors that are neither minorities nor women, to be part of the control group.
Retain the requirement that a designated entity's control group own at least 25 percent
of the applicant's total equity, but require that only 15 percent be held by controlling
members of the control group that are minorities, women or small/entrepreneurial
business principals. The composition of the principals of the control group determines
whether the applicant qualifies for bidding credits, installment payments and reduced
upfront payments. The minimum 15 percent may be held unconditionally, or in the
form of options, provided these options are exercisable at any time, solely at the
holder's discretion, and at an exercise price less than or equal to the current market
valuation of the underlying shares at the time of filing FCC Form 175 (short-form).
The remaining 10 percent of the applicant's equity may be held in the form of either
stock options or shares, and we will allow certain investors that are not women,
minorities or small business/entrepreneurial principals to hold interests in such shares
or options that are part of the control group's equity. Thus, the 10 percent portion may
be any combination of the following: (1) stock options or shares held by investors in
the control group that are women, minorities, small businesses, or entrepreneurs; (2)
management stock options or shares held by individuals who are members of an
applicant's management team (which could include individuals who are not minorities
or women or who have affiliates that exceed the entrepreneurs' blocks or small
business size standards); (3) shares or stock options held by existing investors of
businesses in the control group that have been operating and earning revenues for two
years prior to December 31, 1994; or (4) shares or stock options held by
noncontrolling institutional investors. Three years after the date of license grant, the
25 percent minimum equity requirement would be reduced so that the principals in the
control group would be required to retain voting control and at least a 10 percent equity
interest in the licensee.
Modify the alternative equity option available to applicants controlled by women and/or
minorities (viz., a 50.1 percent equity investment in the applicant with other non-attributable investor(s) holding no more than a 49.9 percent interest) to provide that 30
percent of the applicant's equity must be held by principals of the control group that
are minorities or women, and may also be in the form of options as described above.
The remaining 20.1 percent may be made up of shares and/or options held by investors
that are not minorities or women under the same criteria described above. After three
years from the date of license grant, the women and/or minority principals of the
control group must hold at least 20 percent of the total equity in the licensee and voting
control.
Amend our rules to provide that when the sole member of the control group is a firm
or corporation that was operating and earning revenues for at least two years prior to
December 31, 1994, qualifying principals will only be required to own a 10 percent
equity interest in the applicant from the outset (or 20 percent if the 49.9 percent
investor option available to women and/or minorities is used).
Exempt applicants that are small, publicly-traded corporations with widely dispersed
voting stock ownership from the control group requirement if the company is not
controlled by any entity or group of shareholders holding a controlling interest in the
company's voting stock. As the applicant, such a company therefore must own all the
equity and voting stock to qualify for the exemption. Amend our rule to define a
small, publicly-traded corporation with widely dispersed voting power as a business
entity in which no person (as defined by the Federal securities laws) (1) owns more
than 15 percent of the equity; or (2) has the power to control the election of more than
15 percent of the members of the board of directors.
Simplify our rules by eliminating (a) the $100 million personal net worth cap for all
attributable investors investing in applicants for entrepreneurs' block licenses, and (b)
the $40 million dollar personal net worth cap for all attributable investors in an
applicant seeking to qualify as a small business.
Create a limited exception to our affiliation rules that would exclude the gross revenues
and assets of affiliates controlled by minority investors or enterprises that are members
of the applicant's control group from our financial caps that are the entry criteria for
the entrepreneurs' block and are utilized to qualify as a small business. Exempt
applicants affiliated with Alaska Native Corporations and Indian tribes from the same
financial caps, except create a rebuttable presumption that revenues derived from
gaming, pursuant to the Indian Gaming Regulatory Act, 25 U.S.C. § 2701 et seq., will
be included in determining whether such an applicant qualifies as an "entrepreneur"
and as a "small business."
Clarify that persons or entities that are affiliates of one another or that have an "identity
of interests" will be treated as though they were one person or entity and their
ownership interests aggregated for purposes of determining compliance with our equity
requirements. Thus, for example, if two entities have formed a joint venture or a
consortium to apply for PCS licenses in the A and B frequency blocks, they will be
treated as a single entity and their separate interests will be aggregated when investing
in the same entrepreneurs' block applicant.
Define control of the applicant for purposes of entrepreneurs' block licenses by looking
at traditional standards for determining de facto and de jure control and, in addition,
provide guidelines for establishing and maintaining de facto control.
Clarify the scope of permissible management agreements between noncontrolling
investors (or others) and entrepreneurs' block applicants.
Clarify that rights of first refusal, supermajority voting rights and other such "standard
terms" used to protect investments of noncontrolling shareholders do not individually
trigger transfers of control. The Commission will review such provisions in the
aggregate, in light of the totality of the circumstances, to determine whether they will
be deemed to confer and/or relinquish control. A critical factor in such analysis will be
whether the provisions involved vary from the recognized standard under our case law.
Under no circumstances may such provisions operate to force the designated entity to
transfer its equity or control.
Amend the attribution rules by raising the amount of voting interest that qualifies as
nonattributable from 15 percent to 25 percent. This change allows existing companies
with established financial structures the opportunity to compete in the entrepreneurs'
blocks, and does not sacrifice the objective of retaining control in the control group
(which must still retain at least a 50.1 percent voting interest). Clarify that under our
amended rule, the maximum permissible nonattributable ownership interest that a
noncontrolling investor may hold is equal to, but no greater than, 25 percent of the
total equity of the applicant (which may include no more than 25 percent of the
applicant's voting stock).
Clarify that rights of first refusal will not be considered on a fully-diluted basis for
purposes of calculating the ownership levels held by investors in an applicant. Also,
stock "puts" exercisable after the expiration of the license holding period are generally
not attributable to shareholders holding such options until their exercise date. Stock
"calls" held by investors, on the other hand, are immediately attributable holdings.
Maintain bidding credits at current levels.
Offer installment payments for all entrepreneurs' blocks licensees, regardless of
applicant or BTA size. For companies that are not minority or women-owned and have
revenues between $75 million and $125 million, create a new class of installment
payments, with slightly less generous terms.
Extend the period in which small businesses owned by minorities and/or women are
allowed to make interest-only payments from five to six years.
Clarify that we will permit entrepreneurs' block licensees to transfer entrepreneurs'
block licenses after their third year of ownership, to other entrepreneurs' block
licensees even if the licensee has grown beyond our size limitations to qualify as an
entrepreneur or small business. In years four and five, and subject to applicable unjust
enrichment provisions, entrepreneurs' block licensees may transfer licenses to any
entity that either holds other entrepreneurs' block licenses or that satisfies the eligibility
criteria at the time of transfer.
Retain the rule that limits the number of entrepreneurs' block licenses any single entity
may purchase at 10 percent of the total entrepreneurs' block licenses.
Clarify the definition of "members of minority groups" to be consistent with the
definition of minority used in other contexts.
Provide guidance on issues associated with an entrepreneurs' block licensee's financial
insolvency or in the event of default on installment payments to the Commission.
II. BACKGROUND
7. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the Budget
Act) added Section 309(j) to the Communications Act of 1934, as amended, 47 U.S.C.
§ 309(j). This section gives the Commission express authority to employ competitive bidding
procedures to select among mutually exclusive applications for certain initial licenses. In the
Second Report and Order in this proceeding, the Commission exercised its authority by
determining that broadband PCS licenses should be awarded through competitive bidding and
prescribed a broad menu of competitive bidding rules and procedures to be used for all
auctionable services. We re-examined certain aspects of these general rules and procedures in
the Second Memorandum Opinion and Order (released August 15, 1994).
8. In the Fifth Report and Order, we established specific competitive bidding rules for
broadband PCS. We also decided in the Fifth Report and Order to conduct three separate
auctions for broadband PCS licenses: the first for the 99 available broadband PCS licenses in
MTA blocks A and B; the second for the 986 broadband PCS licenses in BTA blocks C and F
(the "entrepreneurs' blocks"); and, the third for the remaining 986 broadband PCS licenses in
BTA blocks D and E. The rules adopted in the Fifth Report and Order address auction
methodology, application and payment procedures, and other regulatory safeguards. In
addition, we established the entrepreneurs' block licenses to insulate smaller applicants from
bidding against very large, well-financed entities. We also supplemented our entrepreneurs'
block regulations with other special provisions designed to offer meaningful opportunities for
designated entity participation in broadband PCS. In particular, we made bidding credits and
installment payment options available to those entrepreneurs and designated entities that,
according to the record of this proceeding, have demonstrated historic difficulties accessing
capital. Additionally, we extended the benefits of our tax certificate policies to broadband
PCS minority and women applicants to promote participation by these designated entities in
the service. We also adopted attribution rules that accommodate passive equity investment in
designated entities, but ensure that control of the applicant resides in the intended beneficiaries
of the special provisions. Furthermore, we reduced the upfront payment required of bidders
in the entrepreneurs' block. Finally, we established partitioning rules to allow rural
telephone companies to expedite the availability of offerings in rural areas.
9. After the release of the Fifth Report and Order, we adopted on our own motion an
Order on Reconsideration, which made two changes to our competitive bidding rules for
broadband PCS concerning our attribution and affiliation requirements. Specifically, we
exempted from entrepreneurs' block affiliation rules, entities owned and controlled by Indian
tribes or Alaska Regional or Village Corporations. We also decided to permit nonattributable
investors in a corporate applicant to own up to 15 percent of the corporation's voting stock,
provided that the applicant's control group retains at least 25 percent of the equity and 50.1
percent of the voting stock. We applied this change to investors in both publicly-traded
corporate applicants and applicants that are not publicly-traded. Most recently, however, we
adopted a Fourth Memorandum Opinion and Order in this docket, in which we addressed
issues raised in petitions for reconsideration of the Fifth Report and Order that involve our
broadband PCS competitive bidding rules governing auction methodology, application and
payment procedures, and regulatory safeguards to prevent anticompetitive practices among
bidders. In the instant Fifth Memorandum Opinion and Order, we resolve remaining matters
in the petitions for reconsideration concerning our entrepreneurs' block rules, including our
provisions for designated entities.
III. DISCUSSION
A. Concept of Entrepreneurs' Blocks
1. Authority and Amount of Spectrum
10. Background. In the Fifth Report and Order, the Commission designated a portion
of the broadband PCS spectrum available at auction for qualified entrepreneurs. Eligible
entrepreneurs can bid on BTA licenses in the C (30 MHz) and F (10 MHz) blocks. In
addition, entrepreneurs who fall within one of the four statutory "designated entity" categories
(i.e., small businesses, rural telephone companies, and businesses owned by members of
minority groups and/or women) are eligible for additional benefits to enable them to acquire
broadband PCS licenses.
11. Petitions. The Association of Independent Designated Entities (AIDE) contends
that the Commission exceeded its statutory authority in establishing the entrepreneurs' blocks
because they potentially benefit entities that fall outside of the four designated entity groups
enumerated by Congress. AIDE maintains that the entrepreneurs' blocks reduce meaningful
opportunities for smaller designated entities to participate in PCS by forcing them to bid
against "entrepreneurs" that may not qualify as designated entities. AIDE further argues that
the Commission impermissibly restricted the availability of financial incentives to designated
entities for use only in Blocks C and F. Instead, AIDE requests that the Commission make
its financial incentives for designated entities available for every auctionable broadband PCS
license. The United States Interactive & Microwave Television Association and the United
States Independent Personal Communication Association (USIMTA/USIPCA) (filing jointly)
support the entrepreneurs' block concept, but encourage the Commission to provide additional
broadband PCS spectrum exclusively for designated entities. Citing Congress' concern about
the historical impediments that small, minority and women-owned businesses have
encountered, USIMTA/USIPCA maintain that "it would not be unreasonable" to set aside up
to one-half of the available PCS spectrum. Finally, GTE Service Corporation (GTE)
requests the Commission eliminate the entrepreneurs' blocks and instead allow designated
entities to "partner" with major investors and be eligible for more generous bidding credits.
Additionally, GTE contends that our entrepreneurs' block scheme unduly restricts the ability
of cellular carriers to participate in the provision of PCS. Specifically, GTE contends that
this scheme, combined with the PCS-cellular crossownership restrictions, will effectively limit
eligibility for many cellular operators to 20 MHz of spectrum on the D and E blocks.
12. Decision. Contrary to AIDE's contention, it is within our statutory authority to
establish the entrepreneurs' blocks, for which parties other than designated entities are eligible
to apply for or invest in, and we believe that this scheme will provide meaningful opportunities
for designated entities to participate in the provision of broadband PCS. Accordingly, we will
retain the entrepreneurs' block structure set forth in the Fifth Report and Order. In
establishing a competitive bidding process for the provision of spectrum-based services,
Congress gave the Commission broad authority to adopt bidding procedures and policies, so
long as certain objectives are fulfilled. Specifically, Congress mandated that the Commission
"promot[e] economic opportunity and competition and ensur[e] that new and innovative
technologies are readily accessible to the American people by avoiding excessive concentration
of licenses and by disseminating licenses among a wide variety of applicants, including small
businesses, rural telephone companies, and businesses owned by members of minority groups
and women." Thus, the language of the statute allows us to consider other entities in order
to ensure that licenses are widely dispersed among a variety of licensees, so long as we also,
among other statutory objectives, ensure that designated entities are given the opportunity to
participate in the provision of broadband PCS.
13. The entrepreneurs' blocks approach adopted in our Fifth Report and Order
achieves the statute's objectives by creating significant opportunities for designated entities and
other entrepreneurs to ensure that licenses are widely disbursed to entities that can rapidly
deploy broadband PCS services. As discussed more fully infra, we are making additional
changes to our rules (including eliminating the personal net worth cap and liberalizing our
affiliation rules for individual minority investors) to help designated entities overcome
particularly intractable historic difficulties in accessing capital. To satisfy Congress' directive,
we established the entrepreneurs' blocks in conjunction with a package of benefits that are
narrowly tailored to provide significant opportunities to designated entities and those
entrepreneurs that lack access to capital.
14. We disagree with USIMTA/USIPCA who requests that the Commission provide
additional spectrum for entrepreneurs' blocks. Our existing allotment, which comprises one-third of the total amount of licensed broadband PCS spectrum, is sufficient to ensure that
designated entities and other entrepreneurs have significant opportunities to participate in the
PCS marketplace. We therefore deny petitioners' various requests for modification to our
entrepreneurs' block provisions.
15. We also reject AIDE's proposal to make bidding credits and other special
provisions available to all designated entities bidding on all of the broadband PCS frequency
blocks (not just the C and F blocks). Our existing approach of limiting these special
provisions to the entrepreneurs' blocks, coupled with changes we are making today are
narrowly tailored to meet Congress' objective of ensuring that designated entities have the
opportunity to participate in broadband PCS. The record does not support broadening this
relief to include additional frequency blocks, nor is there substantial support for broadening
the availability of special provisions generally.
16. Similarly, we do not accept GTE's argument that we should do away with the
entrepreneurs' blocks and instead offer bidding credits as well as other special provisions
across all broadband PCS frequency blocks. As we already explained in the Fifth Report and
Order, in our judgment we do not anticipate designated entities to realize meaningful
opportunities for participation in broadband PCS unless we supplement bidding credits and
other special provisions with a limitation on the size of the entities designated entities will bid
against. Without the insulation of the entrepreneurs' block, the record strongly supports the
conclusion that measures such as bidding credits will prove ineffective for broadband PCS.
We also disagree with GTE's contention that our entrepreneurs' block plan unduly restricts the
ability of cellular carriers to provide PCS. We believe that the public interest benefits of
establishing an entrepreneurs' block outweigh the need to provide additional opportunities for
cellular operators as GTE describes. Moreover, our rules do allow cellular operators such as
GTE to take noncontrolling interests in designated entities and gain opportunities in the
entrepreneurs' block. We have recently relaxed the cellular-PCS crossownership rules to
facilitate such opportunities.
2. Gross Revenues and Other Financial Caps
a. Gross Revenues and Total Assets
17. Background. In the Fifth Report and Order, the Commission established
eligibility rules for the entrepreneurs' blocks based, in part, on an applicant's gross revenues.
To bid in the entrepreneurs' blocks, the applicant, its attributable investors (i.e., members of
its control group and investors holding 25 percent or more of the applicant's total equity), and
their respective affiliates must cumulatively have gross revenues of less than $125 million in
each of the last two years and total assets of less than $500 million at the time the applicant
files its Form 175 ("short-form" application). We pointed out in the Fifth Report and Order
that the $125 million gross revenues limit corresponds roughly to the Commission's definition
of a "Tier 2," or medium-sized local exchange carrier (LEC) and would include virtually all of
the independently-owned rural telephone companies. Additionally, to qualify for the special
provisions accorded small businesses, the applicant (including attributable investors and
affiliates), must cumulatively have less than $40 million in gross revenues averaged over the
last three years.
18. Petitions. MasTec, Inc. (MasTec) argues that the Commission's gross revenues
test is misleading when applied across the board to all applicants because the gross revenues of
investors operating in different industries will not convey the same information about size or
the ability to attract capital. The Telephone Electronics Corporation (TEC) notes that the
discontinuity between gross revenues and the ability to attract capital is particularly acute
where the entity in question is involved in a volume-intensive business with high operating
costs and small profit margins (such as TEC's interexchange resale carriers). Accordingly,
TEC argues that the Commission's gross revenue criteria are not rationally related to their
stated purpose and should be eliminated.
19. Several petitioners request that the Commission modify its gross revenues test,
but disagree whether the limits should be liberalized or made more restrictive. For example,
MasTec encourages the Commission to modify its designated entity criteria to include those
minority businesses which are too small to compete outside of the entrepreneur blocks, but too
large to qualify for the entrepreneurs' blocks. The National Paging and Personal
Communications Association (NPPCA) and USIMTA/USIPCA urge the Commission to reduce
the gross revenues cap. Specifically, NPPCA requests that the Commission reduce the gross
revenues limit to $75 million and the total assets limit to $250 million. NPPCA maintains
that these modifications are needed because the present size standards encourage mid-sized
companies to refrain from bidding in competitively unrestricted auctions and to compete,
instead, against designated entities in the entrepreneurs' block auctions.
20. As an alternative to increasing the gross revenues cap, Omnipoint
Communications, Inc. (Omnipoint) and the National Association of Black Owned
Broadcasters, Inc. (NABOB) argue that the "aggregation rule," under which the Commission
will aggregate the gross revenues and total assets of the applicant, attributable investors and all
affiliates in order to determine whether the applicant complies with the financial caps, should
be eliminated. Omnipoint contends that a "multiplier approach," employed in other areas of
Commission practice, should be used to determine compliance with the financial caps.
Under this approach, the revenues and assets attributed to an applicant would be based on the
revenues and assets of each attributable investor, multiplied by the percentage ownership
interest in the applicant held by that investor.
21. Cellular Telecommunications Industry Association (CTIA) requests that the
Commission prescribe specific dates for measuring the financial thresholds to determine
entrepreneurs' block eligibility. Specifically, CTIA requests clarification that gross revenues
will be measured from the two years preceding September 23, 1993. CTIA maintains that
our current rules, referring only to the "last two calendar years," are ambiguous.
22. Black Entertainment Television Holdings, Inc. (BET), Roland A. Hernandez
(Hernandez), Columbia PCS, Inc. (Columbia PCS), and Omnipoint all request that we clarify
our rules governing growth by entrepreneurs' block licensees and their attributable investors
during the five-year holding period. Our rule, promulgated in the Fifth Report and Order,
states that "[a]ny licensee . . . shall maintain its eligibility [for the entrepreneurs' blocks] until
at least five years from the date of initial license grant, except that increased gross revenues,
increased total assets or personal net worth due to non-attributable equity investments . . . ,
debt financing, revenue from operations, business development or expanded service shall not
be considered." Petitioners ask us to clarify whether the following types of growth in assets,
revenues, or personal net worth would result in a licensee's forfeiture of eligibility: (1) growth
of applicant beyond the size limits by means of mergers or takeovers; (2) any control group
member's growth beyond the size limits by means of appreciation of attributable investments
or growth of attributable businesses; and (3) affiliates' or attributable investors' growth beyond
the size limits, by means of mergers or takeovers.
23. Decision. We will retain a single gross revenues size standard, which is an
established method for determining size eligibility for various kinds of federal programs that
aid smaller businesses. We anticipate that applicants will, in many instances, have several
investors and that these investors will be drawn from various segments of the economy rather
than from a single industry group such as telecommunications. The financial characteristics of
these industry groups will vary widely, and keying the size standard to each investor entity in
question is thus administratively unworkable. A gross revenues test is a clear measure for
determining the size of a business, and will produce the most equitable result for
entrepreneurs' block applicants as a whole.
24. We will also retain the existing gross revenues and total assets limits for the
entrepreneurs' blocks and for small business size status. We find the arguments of those who
oppose any reduction in the gross revenues limit most persuasive. BET, for example,
supports the balance it perceives the Commission has struck between small and mid-sized
firms by adopting a $125 million gross revenues test. We agree with BET that a decrease in
the gross revenue limit would eliminate many mid-sized firms from entrepreneurs' block
participation while not substantially raising the level of competition in the blocks. Conversely,
an increase in the gross revenue limit would not necessarily provide for greater capital access
for applicants. We believe our $125 million gross revenues test represents an appropriate
benchmark for entry into the entrepreneurs' block, given our interest in including firms that,
while not large in comparison to other telecommunications companies, are likely to have the
financial resources to compete against larger competitors on the MTA blocks.
25. In addition, we will retain the aggregation methodology to assess the size of an
applicant, with certain exceptions discussed infra. We reject NABOB's proposal to eliminate
our aggregation rule and we cannot adopt Omnipoint's proposal to determine entrepreneurs'
block eligibility and small business size status by separately evaluating the assets and revenues
of each attributable investor. Aggregating the gross revenues and total assets of all attributable
investors in and affiliates of the applicant is central to an accurate size determination, and
consistent with the Small Business Administration's (SBA's) approach to similar
determinations. Viewing gross revenues and assets of each investor in isolation could result
in very large entities bidding for these licenses. We reject Omnipoint's suggestion that a
multiplier approach be used to make these size determinations. A multiplier is appropriate to
arrive at an accurate determination of ownership interest in an applicant or licensee. In this
context, however, we are not concerned with ownership, but instead seek to make a
financially-based size determination in order to assess whether an applicant is eligible for
significant governmental benefits.
26. We agree with CTIA that clarification is required concerning the two-year period
in order to provide applicants with a uniform way to measure gross revenues for purposes of
qualifying for the entrepreneurs' blocks. For the initial entrepreneurs' block auctions
involving broadband PCS, companies should use audited financial statements for each of the
two calendar years ending December 31, 1993 or, if audited financial statements are not
prepared on a calendar-year basis, data from audited financial statements for their two most
recently completed fiscal years. Therefore, if applicants and their investors do not have
audited statements ending on December 31, 1993, they will have to use one annual statement
ending at a later date (sometime in 1994). This approach will enable the Commission to obtain
timely financial data while providing applicants with some degree of flexibility in their
financial reporting practices. For subsequent entrepreneurs' block auctions (i.e., license re-auctioning), we will require applicants to use their last two annual audited financial statements
to determine compliance with the financial caps. Newly-formed companies should use the
audited financial statements of their predecessors in interests, or financial statements current as
of the time their short-form application is filed that are certified by the applicant as accurate.
27. Clarification is also needed with respect to the issue of growth and takeovers of
an entrepreneurs' block licensee or its investors. We clarify our rules to the extent necessary
to indicate what types of growth will jeopardize an applicant's continued eligibility as an
entrepreneurs' block licensee during the holding period. A licensee could not maintain its
eligibility if a member of its control group were itself taken over, effecting a transfer of
control of the licensee during the license holding period. However, an attributable investor
would not affect the licensee's continuing eligibility for the entrepreneurs' block if another of
the investor's affiliates grew or its investments appreciated during the holding period. Our
rules consider such growth either to be revenue from the investor's operations or to be normal
business development and, in either case, fully permissible. If an attributable investor is taken
over or purchased by another entity, the other entity steps into the shoes of the original
investor and its assets and revenues will be considered under the continued eligibility rule.
However, if an affiliate of the applicant is taken over by (or sold to) another entity, the other
entity's assets and revenues would not be considered, so long as no new affiliation
arrangement between the applicant and the other entity is created by the takeover or sale. That
is, in most cases, the affiliation with the applicant would be severed by such a takeover and the
gain from the sale of the affiliates' assets would have already been taken into account by the
initial consideration of such assets at the time of application. We emphasize that we have a
strong interest in seeing entrepreneurs grow and succeed in the PCS marketplace. Thus,
normal projected growth of gross revenues and assets, or growth such as would occur as a
result of a control group member's attributable investments appreciating, or as a result of a
licensee acquiring additional licenses (see discussion infra at paragraph 126 on holding period)
would not generally jeopardize continued eligibility as an entrepreneurs' block licensee.
b. Personal Net Worth
28. Background. In addition to the gross revenues and assets caps, the Fifth Report
and Order also established a personal net worth limit to determine eligibility for bidding in the
entrepreneurs' blocks. The current rules require that persons that are applicants, attributable
investors in the applicant and all of their respective affiliates who are themselves individuals
each have less than $100 million in personal net worth. Additionally, the rules require that if
the applicant seeks to qualify as a small business each individual in the control group,
attributable investors and all affiliates who are individuals, must have less than $40 million in
personal net worth.
29. Petitions. BET requests the Commission relax the personal net worth limits
applicable to attributable investors in minority-owned firms. BET argues that eliminating the
personal net worth standard would help ensure participation by minority and women-owned
businesses by allowing successful individuals to bring their experience to bear in the PCS
marketplace. At the same time, BET argues that this measure would ensure that relatively
small, minority and women-owned enterprises have a meaningful opportunity to participate in
the provision of PCS. TEC also requests the Commission liberalize its personal net worth
standard to permit an attributable individual investor to hold up to $125 million in personal net
worth. MasTec claims that net worth/net revenue definitions are overly restrictive and will
exclude those minority businesses that can best survive and succeed in the competitive PCS
market.
30. Decision. We will eliminate the personal net worth limits (both for the
entrepreneurs' blocks and for small business size status) for all applicants, attributable
investors, and affiliates. The obstacles faced by minorities and minority-controlled businesses
in raising capital are well-documented in this proceeding and are not necessarily confined to
minorities with limited personal net worth. Therefore, we agree with the view that the
personal net worth requirements should be eliminated in the case of minority-controlled
applicants seeking to qualify for entrepreneurs' block licenses. However, rather than eliminate
the personal net worth limits for minorities only, we will eliminate the requirement for all
applicants because personal net worth limits are difficult to apply and enforce and may be
easily manipulated. We do not believe that eliminating the personal net worth limits will
facilitate significant encroachment by "deep pockets" that can be accessed by wealthy
individuals through affiliated entities because, in those instances where access to such
resources would create an unfair advantage, the affiliation rules, discussed infra, will continue
to apply and require that such an entity's assets and revenues be included in determining an
applicant's size. Thus, we emphasize that we believe the affiliation rules make the personal
net worth rules largely unnecessary since most wealthy individuals are likely to have their
wealth closely tied to ownership of another business.
c. Treatment of Affiliates
31. Background. The Fifth Report and Order sets forth specific affiliation rules for
identifying all individuals and entities whose gross revenues and assets must be aggregated
with those of the applicant in determining whether the applicant exceeds the financial caps for
the entrepreneurs' blocks (or for small business size status). The affiliation rules were
adapted from those used by the SBA for purposes of assessing size status and consequent
eligibility to participate in SBA's loan, procurement and minority enterprise programs.
32. Specifically, our rules identify which individuals or entities will be found to
control or be controlled by the applicant or an attributable investor by specifying which
ownership interests or other criteria will give rise to a finding of control and consequent
affiliation. In the August 15, 1994 Order on Reconsideration (discussed supra at paragraph
nine), we exempted Indian tribes and Alaska Regional and Village Corporations (hereafter
"Indian tribes") from the affiliation rules for purposes of determining eligibility to participate
in bidding on the entrepreneurs' blocks.
33. Petitions. BET and others argue that we did not provide adequate notice or
opportunity to comment on the possibility of the Commission adopting affiliation rules for all
entrepreneurs' block participants (specifically, minorities and women). BET argues that we
have thus violated the notice and comment requirements of the Administrative Procedure Act
(APA), and that the Commission is required to issue a Further Notice prior to adopting the
affiliation rules. BET also contends that the affiliation rules add unnecessary complexity to
the broadband auction rules and that they make it very difficult, if not impossible, for potential
bidders to tailor their pre-existing business relationships and ownership structures to our
eligibility requirements.
34. Several parties have filed petitions for reconsideration of our Order on
Reconsideration. On reconsideration of the Fifth Report and Order, several petitioners also
challenge the limited exemption granted to Indian tribes or request that generic exemptions be
granted for other applicants. BET and MasTec oppose any special treatment for a particular
minority group, arguing that the exemption accorded Indian tribes creates an imbalance of
bidding power in favor of tribally-owned entities and will skew the broadband PCS auction
results. Cook Inlet Region, Inc. (Cook Inlet) argues that the exemption for Indian tribes
should be expanded to encompass eligibility for treatment as a small business for purposes of
bidding credits and installment payments because: (1) Indian tribes are congressionally
recognized as particularly disadvantaged; (2) such an exemption applies when determining size
status for SBA's programs; and, (3) substantial legal constraints with respect to tribal property
and businesses preclude their use to raise capital or to cross-subsidize other tribally-owned
entities.
35. More specifically, Cook Inlet asserts that Indian tribes and Native corporations
deserve special treatment because they face legal constraints that differ from other minority-owned businesses. According to Cook Inlet, Federal law prohibits Native corporations from
pledging their stock as collateral for loans, issuing new stock to raise funds in traditional
capital markets, or utilizing the majority of the revenues from their land holdings to invest in
new enterprises. Thus, Cook Inlet contends that Indian tribes and Native corporations should
be exempt from both the affiliation rules and the small business test because Native
corporations cannot utilize their assets or revenues to fund new business ventures in the same
way other corporations can. In reply, BET asserts that Alaska Regional Corporations still
enjoy significantly greater access to capital than other minority-owned entities participating in
the bidding for the entrepreneurs' block licenses despite any restrictions they might have on
their assets.
36. TEC seeks an exemption from the affiliation rules for rural telephone companies,
arguing that regulatory and corporate barriers prohibit small telephone companies like TEC
from shifting broadband PCS costs to their affiliated resellers and that courts have found
questions of affiliation to be irrelevant where such barriers to cross-subsidization exist.
MEANS/SDN suggests a more narrowly tailored exception that would exempt centralized
equal access providers (i.e., a consortia of rural telephone companies that provide centralized
equal access and other sophisticated information services) from the Commission's affiliation
rules. MEANS/SDN argues that this modification would allow the consortia to bring their
considerable expertise and efficiencies to bear in the deployment of broadband PCS.
37. Decision. After considering petitioners' various concerns, we will not eliminate
the affiliation rules. As explained fully below, however, we create a limited exception to our
affiliation rules that will apply when an attributable minority investor or enterprise in an
applicant or an applicant's control group has controlling interests in other concerns. We also
revise our treatment of Indian tribes under our affiliation rules to more narrowly tailor our
application of these rules to the unique status of these minority groups.
38. As an initial matter, we do not believe that promulgation of the affiliation rules
violated the notice and comment requirements of the Administrative Procedures Act. Our
Notice of Proposed Rule Making in this docket alerted petitioners to the fact that the
Commission was considering SBA's size standards which, by their terms (as set forth in the
Notice), incorporate the concept of affiliation in determining a firm's small business size
status. The question of affiliation is integral to the concept of size status, by whatever means
size status is assessed. Without affiliation rules, large firms may unfairly avail themselves of
the preferences intended for small businesses and other designated entities since they have an
incentive to create subsidiaries (that would have access to the parent's substantial resources) to
compete against bona fide applicants in the entrepreneurs' blocks. Adoption of affiliation rules
similar to those used by the SBA is a logical outgrowth of the Commission's decision to
impose a gross revenues test for small businesses and to consider SBA's size standards in
establishing that test. It was reasonable for petitioners to conclude that such rules would be
applied in assessing eligibility for the entrepreneurs' blocks and for small business size status.
Thus, sufficient opportunity to comment was provided on the affiliation rules since they play
an integral role in any determination of size status. Moreover, we see no advantage in seeking
additional comment on the affiliation rules since petitioners, such as BET, had a full and fair
opportunity to suggest modifications to our affiliation rules, some of which we adopt on
reconsideration. A Further Notice could also substantially delay the auction of entrepreneurs'
block licenses.
39. Furthermore, we decline to adopt the suggestion that we eliminate the affiliation
rules on the grounds that these rules are unduly complex or overburdensome. Affiliation
rules are an established and essential element in determining an applicant's compliance with a
gross revenues (or other) size standard. Their use ensures that all financial and other
resources available to a company will be considered in assessing its size status. The
Commission's affiliation rules, in conjunction with its attribution rules, are intended to include
in this calculation: (1) all individuals and entities that directly or indirectly control the
applicant, any member of its control group, or any other investor having an attributable
interest in the applicant; (2) any other entities also controlled by such individual or entity;
(3) all entities over which the applicant has direct control or indirect control through an
intermediary; and (4) all other entities over which a member of its control group or any other
attributable investor has direct or indirect control. Elimination of the affiliation rules would
result in an underassessment of an applicant's size and would present an unrealistic picture of
the applicant's need for bidding credits, reduced upfront payments and installment payments.
40. We are persuaded, however, that a limited exception to our affiliation rules is
appropriate for minority-owned applicants and applicants owned by a combination of
minorities and women. The exception will apply to affiliates controlled by investors who are
members of minority groups who are attributable members of an applicant's control group.
Under the exception, the gross revenues and assets of affiliates that the minority investor
controls will not be counted in determining the applicant's compliance with the financial caps,
both for purposes of the entry into the entrepreneurs' block and for purposes of the applicant
qualifying as a small business.
41. This exception will permit minority investors that control other concerns to be
members of an applicant's control group and to bring their management skills and financial
resources to bear in its operation without the assets and revenues of those other concerns being
counted as part of the applicant's total assets and revenues. By making such an exception, we
further our goal of addressing traditional problems minorities have of accessing capital. As we
documented in the Fifth Report & Order, minorities have faced and continue to face unique
barriers to capital from traditional, non-minority sources. To raise capital for a new business
venture, therefore, minorities need the ability to draw upon the financial strength and business
experience of successful minorities and minority-owned businesses within their own
communities; they may not have access to any other source of funds on which to draw.
Moreover, this exception permits minority applicants to pool their resources with other
minority-owned businesses and draw on the expertise of those who have faced similar barriers
to raising capital in the past. We therefore conclude that further tailoring of our affiliation
rules to the specific capital formation problems of minorities is necessary to avoid eliminating
a traditional source of capital for minority businesses -- the minority community itself. We
note that this exception applies only to affiliates controlled by minority investors in the
applicant or members of the applicant's control group. The exception does not apply to
affiliates of such investors or businesses that control the applicant or that have an attributable
interest in the applicant. Thus, a minority-owned firm that exceeds the financial caps would
not be able to create a subsidiary to participate in a PCS applicant's control group.
42. As we established in our Order on Reconsideration, we treat Indian tribes
differently under our affiliation rules for purposes of our entrepreneurs' block financial caps
because of their unique legal status. Specifically, we exclude the gross revenues and total
assets of Indian tribes in our calculations for purposes of determining whether an affiliated
applicant satisfies our entrepreneurs' block financial caps. After considering the arguments
of petitioners, we also will exclude generally the revenues of Indian tribes in our calculations
for purposes of determining small business eligibility.
43. In response to MasTec's and BET's concerns about special treatment for a
particular minority group, we clarify that we exempt Indian tribes generally from our
affiliation rules because Congress has imposed unique legal constraints on the way they can
utilize their revenues and assets. Cook Inlet contends that, while other minority-owned
businesses can issue debt and equity securities and pledge their assets and securities to raise
capital, the real and personal property interests held by Alaska Native Corporations are subject
to a number of constraints -- both legal and cultural -- that affect their ability to manage and
dispose of property. For example, under the Alaska Native Claims Settlement Act, 43
U.C.S § 1601 et seq., the stock held by Native corporations is subject to strict alienability
restrictions - it cannot be sold, pledged, mortgaged, or otherwise encumbered. Thus, Native
corporations are precluded from two of the most important means of raising capital enjoyed by
virtually every other corporation: (1) the ability to pledge stock of the company against
ordinary borrowings, and (2) the ability to issue new stock or debt securities. In addition,
assets held by Indian tribes include land holdings that cannot be used as collateral for purposes
of raising capital, because the land holdings are owned in trust by the federal government or
are subject to a restraint on alienation in the government's favor. Congress has not placed
similar legal constraints on the assets and revenues of enterprises owned by any other minority
group. We agree with Cook Inlet that such legal restraints on assets and revenues place Indian
tribes at a disadvantage vis-a-vis other minority groups with similar revenues and assets.
Finally, as we noted in our Order on Reconsideration, Congress has mandated that the SBA
determine the size of a business concern owned by a tribe without regard to the concern's
affiliation with the Indian tribe. Our policy mirrors this congressional mandate.
44. After considering the record, however, we have determined that gaming revenues
generally are not subject to the same types of legal restrictions as other revenues received by
Indian tribes. Therefore, we establish a rebuttable presumption that revenues derived from
gaming pursuant to the Indian Gaming Regulatory Act, 25 U.S.C. § 2701 et seq., will be
included in our calculations when determining whether an applicant that is affiliated with an
Indian tribe qualifies for the entrepreneurs' block or as a small business. Cook Inlet has set
forth several reasons why we should treat gaming revenues differently from other types of
Indian tribe revenues. First, these revenues were not part of the tribal economic picture when
Congress enacted the SBA tribal exception to the affiliation rule in 1970. Second, the
Indian Gaming Regulatory Act provides certain Indian tribes with a non-traditional source of
revenue that could be very substantial. Cook Inlet also asserts that gaming revenues are not
subject to the same types of legal and governmental controls as other revenues received by
Indian tribes, and therefore are more analogous to the revenues of non-Indian entities.
Furthermore, Congress granted the SBA (whose rules inspired our affiliation rules) flexibility
to treat tribal and other affiliations with exceptional revenues differently if such revenues
would create an "unfair competitive advantage." Gaming revenues generated by tribal
organizations, appear to be exceptional revenues that if not included, create an unfair
competitive advantage in the auctioning of broadband PCS entrepreneurs' block licenses.
Thus, we will include such gaming revenues in our calculations when determining eligibility
for the entrepreneurs' block and for small business status, unless the entrepreneurs' block
applicant establishes that it will not receive an unfair competitive advantage, because
significant legal constraints restrict its ability (or an affiliate's ability) to access and utilize
revenues from gaming.
45. Finally, we decline to create an exception to our affiliation rules for rural
telephone companies. We are concerned that relaxing our rules would unfairly match large
rural telephone companies, with greater access to capital, against entrepreneurs and designated
entities (including small and medium-size rural telephone companies). We note in this regard,
that rural telephone companies already enjoy substantial regulatory benefits (e.g., access to
Rural Electrification Administration loans, discussed infra at paragraph 111) affecting
available capital in comparison to other designated entities. Moreover, we observe that rural
telephone companies will be permitted to acquire partitioned licenses at any time after the
close of auctions. We believe that existing measures will thereby achieve our goal of
facilitating the rapid deployment of PCS to rural areas. At MEANS/SDN's request, however,
we clarify that a centralized equal access provider (i.e., a group of rural telephone companies
that provide centralized equal access and other sophisticated information services) will not
be deemed an affiliate of each of its constituent members. Based on the record, it does not
appear that such entities control their constituent members or that each of the members control
the centralized equal access providers. Thus, for example, if two or more of MEANS'
members form a consortium of small businesses that apply for the entrepreneurs' blocks,
MEANS itself would not be attributed to each one of the small businesses. We agree with
MEANS that this clarification will contribute to the efficient deployment of broadband PCS in
rural areas.
B. Designated Entity Definitions
1. Minority and Women-Owned Businesses
46. Background. In the Fifth Report and Order, we adopted the definition of the term
"members of minority groups" as set forth in our Second Report and Order in this docket.
Thus, we defined "members of minority groups" as ". . . individuals of African-American,
Hispanic-surnamed, American Eskimo, Aleut, American Indian and Asian American
extraction."
47. Petition. Karl Brothers requests that the Commission amend its definition of
"members of minority groups" to include businesses owned by individuals with disabilities.
Specifically, Karl Brothers suggest the Commission adopt the standard established in the SBA
Section 8(a) program to determine who should qualify for designated entity status. According
to Karl Brothers, this SBA program includes businesses owned by disabled individuals under a
"means" and "socially disadvantaged" test. Karl Brothers maintains that the congressional
mandate to give special preference to minority groups is not limited to just ethnic minorities,
but should include other historically disadvantaged minorities. Karl Brothers maintains that
Congress was merely giving examples of groups to be included in the definition of minorities,
not limiting the definition to ethnic groups only. Karl Brothers contends that there is no
statutory language excluding other disadvantaged groups.
48. Decision. After considering Karl Brothers' request, we will not include persons
with disabilities in the definition of minorities for purposes of bidding on the entrepreneurs'
blocks and obtaining the special provisions available to minority applicants. The record in this
proceeding does not contain any evidence that demonstrates that firms owned by persons with
disabilities have more difficulty accessing capital than any other small business. In this
respect, the record of this proceeding on the difficulties that minorities, women and small
businesses, in general, have experienced accessing capital strongly supports the special
provisions we adopted for these groups. Moreover, individuals with disabilities are not
expressly named as a designated entity in Section 309(j)(4)(D) of the Communications Act,
and there is no indication in the legislative record of the statute that Congress intended to
expand this group of beneficiaries to include any group or individual that can demonstrate that
it is "socially disadvantaged" similar to the SBA Section 8(a) approach described by the Karl
Brothers. Unlike the Small Business Act, Section 309(j)(4)(D) of the Communications Act
does not contain the term "socially disadvantaged." Compare 47 U.S.C. § 309(j)(4)(D) with
15 U.S.C. § 637(a)(1), (4) and (5). We note that even in the SBA context, that agency
presumes eligibility for Section 8(a) status for minority groups (which are defined in racial and
ethnic terms), but firms owned by persons with disabilities must demonstrate that they are
"socially disadvantaged" in order to gain entry into the program. Also, the SBA's denial of
Section 8(a) status for firms owned by persons with disabilities where such "social
disadvantage" has not been established, has been upheld in court.
49. Additionally, there is no indication that in enacting Section 309(j)(4)(D) Congress
intended to expand the definition of "members of minority groups" to include classes of
persons other than racial or ethnic groups, such as those listed in the preceding subsection,
Section 309(i). We further observe that in no other Commission context, have we included
disabled persons in the categories of groups that comprise our definition of minorities.
Making such a change here, without clear statutory and legislative support to do so, would
therefore be inconsistent with our traditional application of the definition, which we believe
should be uniform in all licensing contexts.
50. We wish to emphasize also, that it is highly likely that most firms owned by
individuals with disabilities will be eligible to bid in the entrepreneurs' block and for an
installment payment option if they meet the required gross revenues and total assets test.
Such firms may also be eligible for "enhanced" installment payments and bidding credits if
they qualify as small businesses under our rules. Indeed, absent a substantial record that
demonstrates firms owned by persons with disabilities have any more difficulty accessing
capital than any other small business, we find that we cannot accommodate the Karl Brothers
request.
51. We also note that we have before us a Petition for Rulemaking filed by David J.
Lieto (Lieto Petition), which requests that the Commission amend Section 1.2110 of the
Commission's rules to provide that disabled individuals are within the minority group
categories and are thus entitled to the benefits associated with being a designated entity under
the Commission's auction rules. As stated above, we believe that our existing rules provide
opportunities for individuals with disabilities to participate in the entrepreneurs' block, and
that there is no direct statutory or record support for Lieto's request. Furthermore, Lieto has
failed to provide a record comparable to that for women and minorities demonstrating that
disabled individuals experience difficulties accessing capital that are unique to their status.
Accordingly, we decline to initiate a rulemaking at this time, and hereby dismiss the Lieto
Petition.
52. In response to numerous inquiries, however, we revise the definition of
"members of minority groups" slightly to conform with the definition of minority used in other
contexts. Thus, Section 24.720(i) of the Commission's rules shall read as follows:
"Members of minority groups include Blacks, Hispanics, American Indians, Alaskan Natives,
Asians, and Pacific Islanders." We have also been asked to clarify the meaning of particular
categories in the definition of minority. Again, for consistency, we shall use the same
category descriptions the Commission has relied on in other contexts. These categories are
as follows :
a. Black. A person having origins in any of the black racial groups of Africa.
b. Hispanic. A person of Mexican, Puerto Rican, Cuban, Central or South
American or other Spanish Culture or origin, regardless of race.
c. American Indian or Alaskan Native. A person having origins in any of the
original peoples of North America, and who maintains cultural identification
through tribal affiliations or community recognition.
d. Asian or Pacific Islander. A person having origins in any of the original
peoples of the Far East, Southeast Asia, the Indian subcontinent, or the Pacific
Islands. This area includes, for example, China, India, Japan, Korea, the
Philippine Islands, and Samoa.
To address any specific claims or allegations regarding an individual race or origin, we will
follow existing Commission precedent. To the extent that prior Commission cases do not
provide adequate guidance in specific cases, we may look to cases developed under minority
programs in other federal agencies, such as the Office of Management and Budget (OMB) and
the SBA.
2. Small Business Consortia
53. Background. In the Fifth Report and Order the Commission allowed a consortium
of small businesses to qualify collectively for the preferences available to a small business if
each business within the consortium individually satisfies the definition of a small business
designated entity. The Commission defined a small business designated entity as any
company that, together with attributable investors and affiliates, has average gross revenues
for the three preceding years of not in excess of $40 million. We defined "consortium of
small businesses" as a conglomerate organization formed as a joint venture among mutually-independent business firms, each of which individually satisfies the definition of a small
business. In the Second Report and Order, we concluded that consortia should not always
be entitled to qualify for measures designed specifically for designated entities. In the Fifth
Report and Order, however, we stated that for the auctioning of broadband PCS, it is
especially necessary to allow small businesses to pool their resources in this manner to help
them overcome capital formation problems. Thus, our rules provide that if a consortium's
members are all small businesses (i.e., defined as companies that do not have average yearly
gross revenues for the preceding three years in excess of $40 million), the consortium as a
whole will qualify for designated entity provisions for small businesses.
54. Petitions. Omnipoint requests that the Commission allow small businesses to form
a single corporate applicant (rather than a joint venture) and get the same treatment as
consortia. BET requests that the Commission eliminate the preferences available to small
business consortia.
55. Decision. We believe the current preferences for small business consortia are
adequate and necessary to ensure that small businesses have sufficient opportunities to
participate in the broadband PCS auctions. Accordingly, we deny BET's request to eliminate
the small business consortia preferences. As we observed in the Fifth Report and Order,
allowing small businesses to pool their resources in this manner is necessary to help them
overcome capital formation problems and ensure their participation in the provision of
broadband PCS. We believe that small, rural telephone companies, in particular, are expected
to use this mechanism to compete in some of the smaller markets.
56. We also deny Omnipoint's request that small businesses be allowed to form a
single corporate applicant that would be afforded the same treatment as consortia. The
concept of a consortium is that each small business participant remains a distinct corporate
entity independent of other consortium members and that each member has rights and
obligations similar, or equal to, those held by participants in other types of joint ventures.
Allowing a group of small businesses to apply as one corporate applicant and receive the
benefits of our consortia rule would disadvantage small, independent businesses wishing to bid
as a group under our rule, but who cannot restructure as a corporate applicant and could tend
to dilute each member's influence and insulate their responsibilities in the venture. We believe
that such a change would also eviscerate our small business eligibility size requirement. We
wish to clarify, however, that we intend to examine the qualifications of each consortium
member to ensure that each is a bona fide small business. In this regard, it is assumed that
each concern should be an entity "organized for profit" and not for the sole purpose of
qualifying as part of a small business consortia. This is consistent with SBA's long-standing
definition of "business concern." See 43 C.F.R. § 121.403(a), Small Business Size Standards,
54 Fed. Reg. 52634 (Dec. 21, 1989).
57. On another issue, BET contends that the $40 million gross revenues standard fails
to comply with an SBA requirement that any size standard proposed by a federal agency that
varies from SBA's standard be "proposed after an opportunity for public notice and comment"
and be "approved by the Administrator [of the SBA]." We believe we have fully met our
notice and comment obligations, both under the Administrative Procedures Act and the Small
Business Act, in this proceeding. We solicited comment on a range of size options, and
received comment that included SBA's recommendation for a $40 million gross revenues cap
(which we ultimately adopted). Indeed, we recently obtained SBA's approval of the $40
million size standard.
C. Eligibility Requirements
1. Minimum Equity Limit for the Control Group
58. Background. In the Fifth Report and Order, the Commission adopted a
methodology for assessing an applicant's compliance with the financial caps for the
entrepreneurs' blocks and for small business size status based on the distinction between: (a)
noncontrolling investors (whose financial status would not be attributed to the applicant); and
(b) investors holding interests in the control group of the applicant. The gross revenues,
assets and personal net worth limits of attributable investors (i.e., those with more than 25
percent equity) and all control group members, regardless of the size of their individual
interests, are included in assessing an applicant's compliance with the financial caps. To
qualify as a women or minority-owned business, the Commission further required that the
control group be composed entirely of women and minorities. The control group
requirement ensures that designated entity and entrepreneur principals retain control of the
applicant and own a substantial financial interest in the venture. At the same time, it enables
noncontrolling investors outside the control group to provide essential capital to an applicant
without their revenues, assets or net worth being attributed to the applicant or their non-minority or male status disqualifying the applicant.
59. The Commission adopted two control group options in the Fifth Report and
Order. Under the first option, passive investors are permitted to own up to 75 percent of
the applicant's total equity, so long as: (1) no investor holds more than 25 percent of the
applicant's passive equity (which was subsequently defined to include up to 15 percent of a
corporation's voting stock); and (2) in the case of a corporate applicant, at least 50.1 percent
of the voting stock is held by the control group. In the case of partnership applicants, the
control group must own all the general partnership interests. The Commission determined
that this minimum equity level strikes an appropriate balance between the competing
considerations of permitting qualified bidders to raise capital and ensuring that designated
entities receive a significant economic benefit from the venture. The Commission extended
an alternate option to qualified women or minority-owned businesses. Under this option, the
Commission would permit a single investor in a women or minority-owned applicant to own
up to 49.9 percent of the passive equity (which we subsequently defined to include up to 15
percent of a corporation's voting stock), so long as the control group holds the remaining 50.1
percent of the equity. As with the first option, the control group is required to retain control
and, in the case of a corporate applicant, hold at least 50.1 percent of the voting stock.
Also, ownership interests are to be calculated on a fully diluted basis .
60. Petitions. Petitions filed by BET, Columbia PCS, CTIA, EATEL, Lehman
Brothers and Omnipoint variously address the Commission's restrictions on the composition of
an applicant's control group. Specifically, petitioners request clarification that our
attribution rules and definitions of minority and women-owned business be interpreted to
permit "nonqualifying" noncontrolling investors within the control group. "Nonqualifying"
investors, as petitioners describe, are investors that are neither women nor minorities, or
investors that if attributed would cause the applicant to exceed the financial caps. EATEL
argues that to do otherwise may preclude participation by existing companies whose existing
corporate structures would disqualify an applicant absent significant expenditures for corporate
restructuring. EATEL maintains that existing entities have the greatest amount to offer
applicants in terms of financial and technical resources. Petitioners also request that the
Commission allow a limited amount of equity investment in the control group to help the
applicant comply with the 25 percent minimum equity requirement. Columbia PCS, for
example, advocates adoption of a bright-line test that would require at least a 75 percent equity
and a 100 percent voting interest in the control group to be held by "qualifying" entities.
Columbia PCS maintains that designated entities will be unable to raise sufficient capital unless
this clarification is made. EATEL and CTIA maintain that the 100 percent equity
requirement for minority and women-owned control groups is too restrictive for entities
already in existence. Instead, they argue that businesses which are in fact controlled by
women and/or minorities, but which have numerous non-controlling shareholders (including
some that are neither women nor minorities), should be eligible for the preferences we adopted
for minority and women-owned businesses. BET also requests clarification that a control
group may be comprised of a single individual.
61. Omnipoint, Columbia PCS, CTIA and Lehman Brothers contend that the 25
percent minimum equity ownership restriction is too high and that designated entities will face
insurmountable difficulties arranging financing if it is not reduced. To remedy this problem,
Lehman Brothers proposes two alternative solutions. First, for publicly-traded companies,
Lehman proposes that public shareholders with less than 5 percent equity should be counted
towards the control group's 25 percent equity threshold. Lehman maintains that this proposal
would permit control group equity to be diluted by new shareholders, but not below a
minimum equity level (Lehman recommends 10 percent). Second, Lehman suggests that all
designated entities should be permitted to dilute their 25 percent equity interests in the
following circumstances: (a) not earlier than one year after license grant, to dilute control
group equity to a total of not less than 20 percent; (b) not earlier than two years, to dilute
control group equity to a total of not less than 15 percent; and (c) not earlier than three years
to dilute control group equity to a total of not less than 10 percent. Lehman argues that this
proposal would provide designated entities efficient access to capital, thereby improving their
competitive position. CTIA recommends that an applicant should be eligible to bid on the C
and F blocks with at least 10 percent equity. Lehman Brothers also requests that the
Commission modify its control group definition to provide that members of the control group
receive dividends, profits and regular and liquidating distributions in proportion to the actual
possession of equity held, rather than in proportion to their interest in the total equity of the
applicant. Lehman Brothers contends that our rules could be interpreted to mean that such
distributions must be paid on options held but not exercised by control group members, rather
than on the basis of actual shares held.
62. Decision. After considering the record, and as described below, we modify our
rules to allow certain noncontrolling investors who do not qualify for the entrepreneurs' block
or as a small business to be investors in an applicant's control group. We also allow entities
that are controlled by minorities and/or women, but that have investors that are neither
minorities nor women, to be part of the control group. We agree with petitioners that some
accommodation should be made in our regulations to allow participation in an applicant's
control group by existing firms controlled by designated entities or entrepreneurs that have
investors that, if attributed, would cause the applicant to exceed the small business or
entrepreneurs' blocks financial caps or, for minority or women-owned applicants, investors
that are not minorities or women. We will therefore modify our definition of a minority and
women-owned business to include preexisting companies that are controlled by women or
minorities but have noncontrolling investors in the control group who are not minorities or
women. Similarly, we will allow preexisting companies that, in aggregate, meet our
entrepreneurs' block and small business size standards to be members of the control group
even if one or more of the noncontrolling investors in those companies would disqualify the
company based on its gross revenues or total assets. We believe that these rule changes will
provide a reasonable balance between the need to ensure that designated entities have a
significant economic investment in the applicant and the financing realities of a PCS venture.
63. We also agree with petitioners that it is not optimal to require the qualifying
control group members to hold at least 25 percent of the applicant's equity. The record
indicates that in many cases, designated entities and entrepreneurial principals will have
limited capital to contribute to the applicant's equity and that noncontrolling investors will be
unwilling to advance funds to enable the designated entity (even one with management
expertise) to reach the 25 percent threshold. Thus, without some modifications to our rules,
designated entities could face insurmountable difficulties in arranging financing. We therefore
conclude that we should modify our rules to address petitioners' concerns, while balancing the
need to ensure meaningful equity participation by "qualifying" control group members.
64. Specifically, we will retain the 25 percent minimum equity requirement for the
control group, but we will require only 15 percent (i.e., 60 percent of the control group's 25
percent equity holdings) to be held by qualifying, controlling principals in the control group
(i.e., minorities, women or small/entrepreneurial business principals). For example, if the
applicant seeks minority or women-owned status, the 15 percent equity, as well as 50.1
percent of the voting stock of the control group and all of its general partnership interests,
must be owned by control group members who are minorities and/or women. If the applicant
seeks small business status, 15 percent of the equity, as well as 50.1 percent of the control
group's voting stock and all of its general partnership interests, must be held by control group
members who, in the aggregate, qualify as a small business. With regard to establishing
control of the applicant by qualified investors, where the control group is composed of both
qualifying and nonqualifying members, the qualifying members in the control group must have
50.1 percent of the voting stock and all general partnership interests within the control group,
and maintain de facto control of the control group. The control group, in turn, must hold 50.1
percent of the voting stock and all general partnership interests of the PCS applicant. Thus,
qualifying members of the control group will have de jure and de facto control of both the
control group and, indirectly, the applicant. The composition of the principals of the control
group and their legal and active control of the applicant determines whether the applicant
qualifies for bidding credits, installment payments and reduced upfront payments. The 15
percent minimum equity amount may be held in the form of options, provided these options
are exercisable at any time, solely at the holder's discretion, and at an exercise price equal to
or less than the current market valuation of the underlying shares at the time of short-form
filing. The remaining 10 percent (i.e., 40 percent of the control group's minimum equity
holdings) may be held in the form of either stock options or shares, and we will allow certain
investors that are not minorities, women, small businesses or entrepreneurs to hold interests in
such shares or options. Specifically, we will allow the 10 percent portion to be held in the
form of shares or stock options by qualifying investors or by any of the following entities
which may not comply with the entrepreneurs' block requirements (e.g. investors who are not
minorities or women or investors, and/or their affiliates, that exceed the entrepreneurs' block
or small business size thresholds): (1) individuals who are members of an applicant's
management team; (2) existing investors of businesses in the control group that were
operating and earning revenues for two years prior to December 31, 1994; or (3)
noncontrolling institutional investors.
65. As discussed supra at paragraph 59, the Commission also adopted an alternative to
the 25 percent minimum equity requirement for minority and women-owned businesses, which
permits a single investor to hold as much as 49.9 percent of its equity, provided the control
group holds at least 50.1 percent. Several petitioners have expressed similar concerns with
respect to the need to revise the 50.1 percent requirement. Therefore, in tandem with, and
for the same reasons as, the modifications to the 25 percent equity requirement, we make
similar modifications to the rules governing the 50.1 percent minimum equity requirement.
Accordingly, where a minority or women-owned business uses the 50.1 percent minimum
equity option, we will require only 30 percent of the total equity to be held by the principals of
the control group that are minorities or women. The 30 percent may be held in the form of
options, provided these options are exercisable at any time, solely at the holder's discretion,
and at an exercise price equal to or less than the current market valuation of the underlying
shares at the time of short-form filing. The remaining 20.1 percent may be made up of shares
and/or options held by investors that are not women or minorities under similar criteria
described in paragraph 64 above. That is, the 20.1 percent portion of the control group's
equity may be held in the form of shares or stock options by qualifying investors or by any of
the following entities which may not comply with the entrepreneurs' block requirements (e.g.
investors who are not minorities or women or investors, and/or their affiliates, that exceed the
entrepreneurs' block or small business size thresholds): (1) individuals who are members of an
applicant's management team; (2) existing investors of businesses in the control group that
were operating and earning revenues for two years prior to December 31, 1994; or (3)
noncontrolling institutional investors.
66. In addition, the control group minimum equity requirement will be reduced three
years from the date of license grant as suggested by Lehman Brothers, but the control group
must still retain voting control (i.e., 50.1 percent of the vote). According the control group
the option to reduce the equity requirement accommodates the needs of designated entity
licensees to raise capital as they build out their systems. Significantly, the three-year mark
corresponds with the end of the no transfer period under our license holding rule. In the case
of a licensee that has chosen the 25 percent minimum equity option, the principals in the
control group will only be required to hold 10 percent of the licensee's equity after three
years, with no further equity requirements imposed on the control group. Similarly, in the
case of a licensee that has used the 50.1 percent minimum equity option, the principals in the
control group will be required to hold 20 percent of the licensee's equity, and no further
equity requirements will be imposed on the control group.
67. After reviewing the record, we are persuaded that these changes will afford the
control group greater flexibility in raising the necessary equity for participation in the
entrepreneurs' blocks. In particular, we are allowing that 10 (or 20.1) percent of the equity
can come from sources that otherwise would not qualify for the control group. In making
these limited changes to the control group equity requirements, we believe the amended rules
will: (1) promote investment in designated entities generally; (2) attract and promote skilled
management for applicants; and (3) encourage involvement by existing firms that have
valuable management skills and resources to contribute to the success of applicants.
68. With respect to our decision to allow investment in the control group by investors
of preexisting firms, the business involved must be a going concern that has been in existence
for a reasonable period of time prior to adoption of our rules in order to avoid any sham
arrangements. Specifically, the business involved must have been operating and earning
revenues for at least two years prior to December 31, 1994 to qualify for this provision.
While we want to relax the control group equity requirements slightly, we also recognize there
may be an incentive for nonqualifiying investors to purchase substantial interests in
"preexisting" businesses unless we place some restrictions on those investors. As a practical
matter, however, we realize that the identity of noncontrolling investors in such businesses,
particularly if they are publicly-traded companies, will change regularly. As we state infra in
our discussion on the treatment of preexisting businesses that are the sole control group
member, we intend that the allowed equity (10 or 20.1 percent) portion should be held by
existing investors in such a company although we will not place limits on who qualifies as
such an investor. We emphasize, however, that we will scrutinize any significant equity
restructuring of preexisting companies that occurs after adoption of our rules. We would
presume that any change of equity by an investor in a preexisting company (that is in an
applicant's control group) that is five percent or less would not be significant, and the burden
is on the applicant to demonstrate whether changes in equity that exceed five percent are not
significant.
69. We also agree with petitioners and commenters that greater flexibility should be
afforded to any applicant whose ownership structures were established before our designated
entity requirements were formulated. Therefore, as a further modification, if the sole
control group member of an applicant is a business that was in existence and had earnings
from operations for at least two years prior to December 31, 1994, we offer the option that
control group principals establishing the applicant's status as a minority and/or women-owned
business, small or entrepreneurial business may hold 10 percent of the applicant's equity if the
25 percent equity option is used, or a 20 percent equity interest if the 50.1 percent equity
option is used. The balance of the control group's equity contribution (i.e., 15 or 30.1
percent) must be held in the form of shares or stock options by any of the following:
(1) qualifying principals in the control group; (2) individuals who are members of the
applicant's management team (which could include "nonqualifying" individuals); or (3)
existing investors of businesses in the control group that were operating and earning revenues
for two years prior to December 31, 1994.
70. The lower equity requirement of 10 percent for preexisting companies that are sole
control group members addresses the concerns of these firms, many of which have already
undergone successive rounds of financing that may have diluted the qualifying investors'
original equity interest in the business. Existing firms that were structured prior to the
adoption of the entrepreneurs' block regulatory scheme are less likely to become "fronts" for
businesses that would not qualify for the entrepreneurs' blocks or the special provisions
accorded designated entities. This option is solely intended to accommodate long-standing
capital structures of applicants that have already been required to dilute equity ownership to
raise capital. Thus, we will require that the portion of equity not held by qualifying principals
(15 or 30.1 percent, as the case may be) to be comprised entirely of existing investors of the
company (unless the equity is held by management or qualified principals of the control
group). As we stated above, we recognize that for many companies, especially those that are
publicly-traded, the identities of noncontrolling investors change regularly. Thus, as stated
supra, we will not place limits on the amount of time a particular individual or entity must
have been an investor in the company. We emphasize, however, that we will scrutinize
carefully applicants that engage in significant equity reshuffling after adoption of our rules.
By giving preexisting applicants additional flexibility, we do not intend to place other
applicants at a competitive disadvantage by permitting greater capital infusion from
institutional investors.
71. In implementing our requirements, we will provide that where the interests in
question are not held directly in the applicant, a multiplier will be used to calculate the
effective interests held by the control group principals toward fulfillment of the minimum
equity requirement. In addition, we will use a multiplier to calculate the interests of
noncontrolling investors in the control group so as to assess compliance with the 25 percent
nonattributable equity limit. A multiplier is a traditional tool used by the Commission to
calculate the effective ownership levels of investors that, through one or more intervening
corporations, hold indirect interests in a licensee.
72. Additionally, in a written ex parte presentation, Metricom requests that we exempt
small, publicly-traded corporations with widely dispersed voting stock ownership from our
control group requirement. Metricom contends that the control group concept is unworkable
for small, publicly-traded companies, because it would not be possible to identify a group of
shareholders that own 50.1 percent of the corporation's voting stock. As a result, such
corporations could be unable to establish eligibility for the entrepreneurs' blocks, or status as a
small business. Metricom proposes a test for identifying small, publicly-traded corporations
with widely dispersed voting stock ownership that closely follows guidelines used by the
Securities and Exchange Commission.
73. We will adopt Metricom's proposal, and create a limited exemption from the
control group requirement for small, publicly-traded corporations with widely dispersed voting
stock ownership. As Metricom points out, a significant number of small, publicly- traded
companies have such widely dispersed voting stock ownership that no identifiable control
group exists or can be created. Without a control group, such companies may not be able
bid for entrepreneurs' block licenses or qualify for small business status even though their
gross revenues and assets meet our financial caps. It was not the Commission's intent that
these companies be denied the opportunity to bid on the entrepreneurs' block, or to qualify for
treatment as a small business.
74. Consistent with Metricom's proposal, a small, publicly-traded corporation will be
found to have dispersed ownership of voting stock if no person (including any "group" as that
term is used in the Securities Exchange Act of 1934) has the power to control the election of
more than 15 percent of the corporation's directors. In addition, we will require that no
person shall have an equity interest in the applicant of more than 15 percent, which is
consistent with our revised equity requirements for small business applicants utilizing a control
group. Under those requirements, discussed supra at paragraph 64, small business principals
in an applicant's control group must hold at least a 15 percent interest in the applicant (in
combination with an additional, 10 percent equity interest that may come from "nonqualifying"
sources). A 15 percent equity requirement is appropriate here because the same percentage of
equity is needed for a small business applicant's control group to satisfy its equity obligations
(unless it is a preexisting company), and because a 15 percent equity cap is likely to ensure
that no control questions arise. We emphasize that this control group exemption will only
apply to an applicant or licensee that is not controlled by any entity or group other than
corporate management, as should be the case where there is no identifiable group of
shareholders holding a controlling interest in the company's voting stock. A small corporation
that has dispersed voting stock ownership and no controlling affiliates will therefore not be
required to aggregate with its own revenues and assets the revenues and assets of management
and shareholders for purposes of entrepreneurs' block eligibility or small business status.
75. Small, publicly-traded corporations that choose to exempt themselves from the
control group requirement must own all the equity and voting stock of the applicant or
licensee. We find their ability to rely on the corporation's existing capital structure to
introduce new passive investment on an ongoing basis provides a level of flexibility that is
comparable to applicants/licensees with an identifiable control group. We note that minority
and/or women-owned businesses would not qualify for this exemption since a control group is
necessary to determine whether the applicant is controlled by minorities or women.
76. Finally, we consider a few other points. First, as BET requests, we clarify that an
individual can be the control group of an applicant, so long as our equity requirements and
other provisions are satisfied. In response to Lehman Brothers' concerns, we clarify the
control group requirements to provide that control group investors must receive dividends,
profits, and regular and liquidating distributions in proportion to their actual possession of
equity holdings, rather than in proportion to their interest in the total equity (which may
include options not yet exercised). Finally, we see no conflict in our rules with a Pacific
Telesis' proposal to allow designated entities and their partners to allocate amongst themselves
tax benefits on a non-pro rata basis.
2. De Facto Control Issues and Management Contracts
77. In the Fifth Report and Order, we provided that the designated entity control
group must have de facto as well as de jure control of the applicant and must be prepared to
demonstrate that it controls the enterprise. The requirement of de facto control arises from
Section 310(d) of the Communications Act, which prohibits any transfer or assignment of
license or transfer of control of a corporation holding a license without the Commission's
authorization. To help in determining what constitutes a transfer of control under this
statutory provision, we follow precedent defining de facto control. We also apply this
standard in the case of designated entities to determine whether the applicant is in fact
controlled by qualifying individuals or entities. Several petitioners seek reconsideration or
clarification of our de facto control standard, particularly as it applies to questions of de facto
control by the designated entity control group and use of management contracts by licensees.
a. Definition of De Facto Control
78. Background. The Fifth Report and Order does not set forth specific guidelines
defining de facto control in the entrepreneurs' block context. Because issues of de facto
control are necessarily fact-specific, we have treated the issue as one to be handled on a case-by-case basis. Consequently, a wide variety of factors may be relevant to determining
whether a control group has de facto control of a particular applicant, applying in the
entrepreneurs' blocks.
79. Petitions. Some petitioners ask us to provide more specific guidelines with
respect to what does and does not constitute de facto control. Omnipoint states that such
guidelines would help designated entity applicants in setting up their management structure.
Others seek assurance that designated entity control groups can meet the de facto control test
even if they enter into agreements containing "standard" covenants for the protection of non-majority or non-voting shareholders, e.g., supermajority voting requirements for major
corporate changes, liquidation preferences (commonly in the form of preferred stock), rights
of first refusal, veto rights concerning particular corporate transactions, or the preemptive
right to purchase stock to prevent dilution.
80. Decision. We continue to believe that determinations of de facto control for
purposes of determining designated entity eligibility for entrepreneurs' blocks are inherently
factual and therefore will require case-by-case determination. Nevertheless, to provide a level
of certainty for designated entities and to ensure that designated entities maintain de facto
control, we believe it is appropriate to articulate some guidelines for defining de facto control
in this context. We therefore clarify that a designated entity or entrepreneurs' control group
must demonstrate at least the following indicia of control to establish that it retains de facto
control of the applicant: (1) the control group must constitute or appoint more than 50 percent
of the board of directors or partnership management committee; (2) the control group must
have authority to appoint, promote, demote and fire senior executives that control the day-to-day activities of the licensee; (3) the control group must play an integral role in all major
management decisions; and (4) in the case of applicants controlled by minorities and women,
at least one minority or female control group member must have senior managerial
responsibility over day-to-day operations, e.g., as President or CEO of the licensee. We
emphasize, however, that these criteria are guidelines only and are not necessarily dispositive
of the issue of de facto control in all situations. Even where these criteria are met, therefore,
the determination of whether de facto control exists will depend on the totality of
circumstances in the particular case.
81. With respect to provisions benefitting non-majority or non-voting shareholders,
we recognize that inclusion of such provisions is a common practice to induce investment and
ensure that the basic interests of such shareholders are protected. For example, many
corporations require a supermajority of shareholders to approve major corporate decisions
such as taking on additional debt, significant corporate acquisitions, or issuance of new stock.
Similarly, strategic investors making large passive equity contributions to a company
frequently insist on a right of first refusal exercisable in the event that a third party seeks to
purchase the company. We agree with petitioners that allowing such provisions enhances the
ability of designated entities to raise needed capital from strategic investors, thereby bolstering
their financial stability and competitive viability. We believe, however, that precedent
provides guidance in determining the appropriate extent to which these safeguards may protect
investment. We therefore clarify that under our case law non-majority or non-voting
shareholders may be given a decision-making role (through supermajority provisions or similar
mechanisms) in major corporate decisions that fundamentally affect their interests as
shareholders without being deemed to be in de facto control. Such decisions generally
include: (1) issuance or reclassification of stock; (2) setting compensation for senior
management; (3) expenditures that significantly affect market capitalization; (4) incurring
significant corporate debt or otherwise encumbering corporate assets; (5) sale of major
corporate assets; and (6) fundamental changes in corporate structure, including merger or
dissolution. We also clarify that non-majority or non-voting investors may hold rights of
first refusal, provided that right is exercisable only to prevent dilution of the investor's interest
or a transfer of control by the control group to a third party. We also observe that we would
not look favorably upon an assignment or transfer of a license that resulted from rights of first
refusal being exercised if (1) the holder of such rights was a manager of the licensee, and (2)
there was evidence the manager had not acted to maximize the profitability of the business in
order to ensure that the options would be exercised at a lower price.
82. While we conclude that the provisions described above will generally not be
considered to deprive an otherwise qualified control group of de facto control, some proposals
made by petitioners and commenters to benefit non-majority shareholders would violate this
standard. For example, non-majority shareholders should not have the power to select or
replace members of the control group or key employees of the corporation. Further, as
discussed in the Second Report and Order in this docket, we do not intend to restrict the use of
preferential dividends and liquidation preferences. We will scrutinize, however, any
mechanisms that deprive the control group of the ability to realize a financial benefit
proportional to its ownership of the applicant. Finally, we emphasize that any final
determination of whether a control group has yielded de facto control to outside investors must
depend on the circumstances of the particular case. For example, while certain provisions
benefitting non-majority investors may not give rise to a transfer of control when considered
individually, the aggregate effect of multiple provisions could be sufficient to deprive the
control group of de facto control, particularly if the terms of such provisions vary from
recognized standards. To facilitate review of such provisions, we will amend the Form 401
(long-form) to require winners of C and F block auctions to disclose any such covenants and
terms that protect non-majority investors' rights in the licensee.
b. Management Contracts
83. Background. An issue of concern to many petitioners and commenters is whether
designated entities may enter into management agreements with third parties without being
deemed to have engaged in an unauthorized transfer of control. Although we did not expressly
address this issue in the Fifth Report and Order, we have traditionally scrutinized common
carrier management agreements for this purpose under the Intermountain Microwave test,
and we recently extended the use of this test to all CMRS providers in our Fourth Report and
Order in Gen. Docket 93-252. Under this test, a licensee may enter into a management
agreement with a third party provided that the licensee retains exclusive responsibility for
operation and control of the licensed facilities, as determined by the following six factors: (1)
unfettered use of licensed facilities and equipment; (2) day-to-day operation and control; (3)
determination of and carrying out of policy decisions; (4) employment, supervision, and
dismissal of personnel; (5) payment of financial obligations; and (6) receipt of profits from
operation of the licensed facilities.
84. Petitions. In its petition, Pacific Bell contends that the Intermountain Microwave
test needs to be clarified to eliminate uncertainty about the permissible scope of management
agreements. Pacific Bell notes that the D.C. Circuit has recently remanded a case in which
the Commission purportedly misapplied the Intermountain test and argues that further guidance
from the Commission is therefore needed to prevent sham agreements between designated
entities and third party managers. Other parties also support the view that the Commission
should clarify its standards regarding management contracts, but do not necessarily agree
about what standard should be articulated. NABOB, for example, argues that the
Intermountain test is too rigid and that a more flexible standard should be applied to
designated entities who enter into management agreements. Columbia PCS, on the other
hand, contends that the Commission should apply a stricter standard by limiting managers to
performing discrete functions on a subcontractor basis as opposed to assuming broad
responsibility for system management.
85. Decision. As noted above, we have recently held in Gen. Docket 93-252 that the
Intermountain Microwave standard applies to all CMRS licensees who enter into management
contracts. Because we have determined that broadband PCS licensees will be presumptively
classified as CMRS providers, we reaffirm the applicability of the Intermountain standard
here. We disagree with NABOB's view that this standard is not sufficiently flexible to account
for the management needs of designated entities. The six Intermountain factors provide
reasonable benchmarks for ensuring retention of control by the licensee while allowing for full
consideration of the circumstances in each case. In the case of designated entity applicants,
they will ensure that designated entities participate actively in the day-to-day management of
the company while allowing reasonable flexibility to obtain services from outside experts as
well. We believe that relaxing the Intermountain standard, by contrast, could give rise to
sham agreements in which designated entities do not exercise actual control.
86. While we reject the view that scrutiny of management contracts should be relaxed,
we also disagree with the view that such contracts should be subject to a stricter standard than
we have applied previously. We conclude that limiting managers to discrete "subcontractor"
functions, as Columbia PCS proposes, could prevent designated entities from drawing on
managers with broad expertise. Moreover, whether a manager undertakes a large number of
operational functions is irrelevant to the issue of control so long as ultimate responsibility for
those functions resides with the licensee.
3. Attribution Rules
a. Voting Equity
87. Background. The Fifth Report and Order provided that an investor may hold a 25
percent passive equity interest in the entrepreneurs' block applicant before its interest is
attributable for purposes of our eligibility rules. In addition, the passive equity investment
for closely-held companies could include no more than five percent voting equity, while
publicly-traded companies could include no more than 15 percent voting equity. In a
subsequent Order, we increased the threshold percentage of non-attributable voting equity
from five percent to 15 percent for closely-held companies. Similarly, for the alternative
equity option available to women and/or minority principals, the 49.9 percent passive
investment could include no more than 15 percent voting equity.
88. Petitions. Petitioners request that the Commission increase the threshold
percentage of non-attributable voting equity from 15 percent to an amount ranging from 20
percent to 49 percent. In addition, petitioners request that the Commission clarify whether
the existing rules permit nonattributable investors outside of the control group to hold a less
than 25 percent or a less than or equal to 25 percent equity interest in the applicant. Also,
on reconsideration of our Order on Reconsideration (discussed supra), parties have debated
our decision to raise the voting equity threshold for closely-held applicants from five to 15
percent. AIDE argues that raising the voting level of closely-held applicants is imprudent
because it increases the likelihood that big business will control the applicant. AMP
disagrees with AIDE that 15 percent voting control would increase the likelihood of shams,
because 15 percent is still not a controlling percentage. Rather, AMP argues that increasing
the permissible level of voting equity will enable applicants to attract more equity financing,
thereby increasing the applicant's likelihood of success.
89. Decision. We amend our attribution rules to raise the voting equity threshold that
qualifies an investor as having an attributable interest in an applicant to 25 percent. We will
raise the voting equity level for both publicly-traded and closely-held corporations, and will
apply the 25 percent threshold for the 25/75 percent equity option available to all applicants
and to the 49.9/50.1 percent equity option additionally available to minority and/or women
applicants. We observe that 25 percent is the percentage suggested by both CTIA and BET.
We agree with CTIA that investors will be more likely to invest in new companies if they have
the ability to protect their investment through increased voting rights. We also agree that a
25 percent voting interest will not convey a significantly greater risk of control than a 15
percent voting interest. BET asserts that higher voting thresholds will enable a larger
number of existing companies -- those which have established financial structures with a
higher percentage of voting stock owned by noncontrolling stockholders -- to compete in the
entrepreneurial block. Furthermore, in other contexts, Congress has used a 25 percent
threshold as a measure of determining control. For example, under Section 310(b) of the
Communications Act, foreign companies are permitted to directly or indirectly control up to
25 percent of CMRS licensees. We believe that in this context as well, a 25 percent
threshold strikes an appropriate balance between the need to encourage investment and our
goal of ensuring that designated entities remain in clear control. Finally, for purposes of
clarification, the maximum permissible nonattributable equity level may be no greater than 25
percent of the applicant's total equity and includes the right to vote such shares (e.g., through
voting trusts or other arrangements).
90. Additionally, however, to discourage large investors from circumventing our
equity limitations for nonattributable investors, we clarify that persons or entities that are
affiliates of one another, or that have an "identity of interests," will be treated as though they
are one person or entity and their ownership interests aggregated for purposes of determining
compliance with our maximum nonattributable equity limits. We will aggregate their
ownership interests in calculating their total equity interests in the applicant and in determining
whether their gross revenues and assets will be attributed to the applicant. Thus, for example,
if two entities form a joint venture or consortium to apply for broadband PCS A and B block
licenses, they have an identity of interests that is characteristic of affiliates, and will be treated
as a single entity when investing in the same entrepreneurs' block applicant. Consequently,
under our rules we would aggregate all equity investments in the applicant and count it as a
single, possibly attributable investment in the applicant where such investors have an identity
of interests.
b. Ownership Interests
91. Background. The Fifth Report and Order states that ownership interests are to be
calculated on a fully diluted basis and that all agreements such as warrants, stock options and
convertible debentures will generally be treated as if the rights thereunder have been fully
exercised. Designated entities are required to disclose any business five percent or more of
whose stocks, warrants, options or debt securities are owned by the applicant or an officer,
director, stockholder or key management personnel of the applicant.
92. Petitions. Petitioners and ex parte commenters request that we clarify our rules
regarding the treatment of various ownership instruments such as warrants, stock options and
convertible debentures. Additionally, commenters have asked whether rights of first refusal
are considered options and how stock "calls" and "puts" will be treated. A"put" option
gives the holder the right to sell a share of stock at a specified price at any time up to the
expiration date. Conversely, a "call" option gives the holder the right to buy a share of stock
at a specified price, known as the "exercise price."
93. Decision. In general, we will treat stock options as fully exercised with the
exception of some ownership instruments discussed infra at paragraphs 95-96. We recognize
that some forms of options are common and often beneficial to the management of a company.
Many companies, for example, include stock options in senior management compensation
packages. We also recognize that treating options as fully exercised will encourage companies
to hire minorities and women for top management positions, because any options they receive
will count toward the equity eligibility requirement.
94. We decide that for purposes of calculating ownership interests, however, some
ownership instruments will not be treated as "fully diluted," or will not be considered options
generally. For example, we will not consider rights of first refusal as options when
calculating ownership interests. Rights of first refusal differ from other types of options
because they cannot be exercised unless there is a proposed sale to a third party. Sales and
transfers to third parties are restricted during the holding period, so rights of first refusal do
not threaten the composition of designated entities. At the end of the five-year period, it
will still be the designated entity's decision as to whether to sell the business, which ensures
that the designated entity controls the decision whether to sell. We agree that without these
rights, investors are likely to shy away from investing in designated entities. As Pacific
Telesis and BellSouth point out, rights of first refusal are a valued safeguard mechanism
because they give investors some control over the entry of new business associates. They
also enable investors to prevent their own shares from becoming diluted as a result of a sale.
95. "Put" options held by the designated entity -- which can be realized only after the
licensee can permissibly transfer the license -- will not be treated as fully diluted for purposes
of determining ownership interests. Put options held by the designated entity leave the
ownership decision in the designated entity's control and do not force an unwanted sale upon
the designated entity. We observe, however, that while such options will not be factored in
for purposes of determining de jure control, we will continue to look at whether put options in
combination with other terms to an agreement deprive an otherwise qualified control group of
de facto control over the applicant. Thus, a "put" in combination with other terms to an
agreement may result in an applicant not retaining de facto control. For example, if an
agreement between a strategic investor and a designated entity provides that (1) the investor
makes debt financing available to the applicant on very favorable terms (e.g., 15 year-term, no
payments of principal or interest for six years) and (2) that the designated entity has a one-time
put right that is exercisable at a time and under conditions that are designed to maximize the
incentive of the licensee to sell (e.g., six years after issue, option to put partnership interest in
lieu of payment of principal and accrued interest on loan), we may conclude that de facto
control has been relinquished. "Call" options held by investors will be considered exercised
immediately to calculate ownership levels because they can be used to force a designated entity
to sell its ownership interests. Finally, we observe that such a call option would vest an
impermissible degree of control in the applicant's so-called "noncontrolling" investors.
96. In summary, agreements between designated entities and strategic investors that
involve terms (such as management contracts combined with rights of first refusal, loans, puts,
etc.) that cumulatively are designed financially to force the designated entity into a sale (or
major refinancing) will constitute a transfer of control under our rules. We will look at the
totality of circumstances in each particular case. We emphasize that our concerns are greatly
increased when a single entity provides most of the capital and management services and is the
beneficiary of the investor protections.
D. Special Provisions For Designated Entities
1. Bidding Credits
97. Background. In the Fifth Report and Order, we determined that bidding credits
were necessary to better ensure that women and minority-owned businesses and small
businesses have meaningful opportunities to participate in broadband PCS. Accordingly,
our rules provided that small businesses will receive a 10 percent credit, women and minority-owned businesses will receive a 15 percent credit, and small businesses owned by women and
minorities will receive an aggregate credit of 25 percent. Our decision in the Fifth Report
and Order to enhance the effectiveness of the entrepreneurs' blocks through the addition of
bidding credits reflected our expectation that broadband PCS will be a capital intensive
undertaking. We stated that bidding credits would function as a discount on the bid price a
firm will actually have to pay to obtain a license and, thus, would directly address the
obstacles to raising capital encountered by small, women and minority-owned firms.
98. Petitions. Several petitioners request that we increase the level of bidding credits.
For example, while some petitioners argue in favor of higher bidding credits for all designated
entities, others seek to raise the bidding credit for women and minority-owned businesses,
or only for minority-owned small businesses. Many of these petitioners find support in our
Third Memorandum Opinion and Order in this docket, where we raised the bidding credit for
minority and women-owned businesses bidding on regional narrowband PCS licenses from 25
percent to 40 percent. Two petitioners contend that rural telephone companies should
receive a 10 percent bidding credit, that would be cumulative with any other bidding credits
for which the applicant would be eligible. Finally, consistent with its argument that the
entrepreneurs' blocks should be abolished, GTE supports availability of bidding credits across
all broadband PCS channel blocks.
99. Decision. We will retain our existing bidding credit scheme. Present levels of
bidding credits, coupled with other provisions directed at the capital formation problems of
designated entities, such as size limitations on the entrepreneurs' block and installment
payments, are sufficient to achieve our regulatory objectives. Moreover, additional
measures that we have adopted on reconsideration, including elimination of the limits on
personal net worth and relaxation on the attribution of affiliates owned and controlled by
minorities, will further enhance the value of the bidding credits to women and minority-owned
firms in particular. We find that our action on reconsideration of the narrowband PCS auction
rules does not dictate raising the bidding credit in this instance. As the Third Memorandum
Opinion and Order makes clear, the 40 percent bidding credit for women and minorities
bidding on regional narrowband PCS licenses was adopted in the absence of any
entrepreneurs' blocks. Further, we state that in the insulated entrepreneurs' block setting, a
25 percent bidding credit for minority and/or women-owned small firms is more
appropriate.
100. We also find that the record does not support creation of a new bidding credit for
rural telephone companies. In this regard, we agree with BET that petitioners have failed to
demonstrate a historical lack of access to capital that was the basis for according bidding
credits to small businesses, minorities and women. To the extent that a rural telephone
company is also a small business, or minority or women-owned, then bidding credits would,
of course, be available. We also decline to adopt GTE's scheme to eliminate the
entrepreneurs' blocks, and distribute bidding credits throughout the broadband PCS channel
blocks. As Omnipoint, Columbia PCS and BET observe, the insulation provided by the
entrepreneurs' block is key to the utility of bidding credits in such a capital intensive
undertaking.
2. Installment Payments
101. Background. In the Fifth Report and Order we made installment payments
available to most businesses that obtain entrepreneurs' block licenses. Installment payments
directly address the significant barriers that smaller businesses face in accessing private
financing. With the expectation of enormous costs associated with obtaining and operating a
broadband PCS license, installment payments provide low-cost government financing that
reduces the amount of private financing needed before and after the auction. Our
installment payment plan was made available to all entrepreneurs' block eligibles granted
licenses in the 50 largest BTAs. In the smaller BTAs where the costs of license acquisition
and operation are expected to be lower, installment payments are only available to licensees
owned by women and minorities, and licensees with less than $75 million in gross revenues.
We also provided an "enhanced" installment payment plan for small businesses and businesses
owned by women and minorities where interest-only payments were required for such entities
for as long as five years from the date of license grant if the firm is both small and owned by
women or minorities. By tailoring the deferral of principal payments to the needs of the
particular designated entities, we promoted greater participation in broadband PCS by viable
competitors.
102. Petitions. Vanguard asks us to offer installment payments to all entrepreneurs'
block winners for all BTAs. Without this relief, Vanguard contends that small cellular
carriers that are, in fact, more likely to serve the smaller markets would be forced to comply
with the same payment schedule as large carriers bidding for smaller markets. SBPCS seeks
to eliminate interest on installment payments altogether, and limit availability of a installment
payment plans to revenues less than $75 million dollars. Hernandez requests that the
Commission require bidders to demonstrate their ability to meet the terms of an installment
payment plan when the short-form application is filed.
103. Decision. We will extend availability of installment payments to all
entrepreneurs' block licensees, regardless of gross revenues. A key factor to the overall
success of the entrepreneurs' blocks is the installment payment plan. The installment plan was
established to facilitate the entry of small and minority-owned businesses into the broadband
PCS market. The top 50 BTAs will be the most competitive wireless communications markets
in the country and will require inordinately large amounts of capital. It will be extremely
challenging for any entrepreneurs' block participant to compete in these markets. The
installment plans will greatly enhance the ability of all entrepreneurs' block participants to
raise capital to succeed against major, well-capitalized competitors. As Vanguard points out,
disallowing installment payments to large entrepreneurs' block winners of smaller BTAs
unfairly restricts these companies from competing for markets in which they will have a
logical interest. In addition, the larger entrepreneurs would be forced to pay for BTAs on
the same terms as major companies that do not qualify for the entrepreneurs' blocks. While
we accept these arguments, and therefore extend installment payments to all entrepreneurs'
block licensees, we note that the terms of these payments should be less generous than those
extended to smaller companies, less able to access traditional sources of capital. Therefore,
we will require entrepreneurs with gross revenues exceeding $75 million to make a post-auction down payment equaling ten percent of their winning bids, but then pay the remaining
90 percent of the auction price in installments with interest charges to be fixed at the time of
licensing at a rate equal to that for ten year U.S. Treasury obligations plus 3.5 percent, with
payments on both interest and principal required.
104. We decline to reduce or eliminate interest rates entirely because we believe that
the present approach achieves the proper balance among our regulatory objectives. In
particular, our present tailoring of interest rates to the needs of the designated entity enables
licenses to be disseminated to small businesses and furthers the congressional goal of allowing
taxpayers to reap a portion of the value of the licenses. Reducing or eliminating interest
payments could result in very high bids, which could reduce competition and promote defaults
among entrepreneurs. Such an approach could also encourage speculation instead of legitimate
applicants who can attract capital. On our own motion, however we will amend 47 C.F.R. §
24.711 to permit small businesses owned by minorities and/or women to make interest-only
payments for six years from the date of license grant. Under our current rules, principal
payments start to come due at the same time the entrepreneur is permitted to transfer the
license and immediately following the first, build-out requirement. By deferring payment of
principal an additional year, we intend to assist the designated entity in avoiding an unwanted
sale of business at the five-year mark in order to avoid payment of principal. Finally, for the
reasons discussed in the Fourth Memorandum Opinion and Order, we believe that our existing
requirements for broadband PCS auction applicants adequately measure an applicant's ability
to pay. We therefore decline to impose more stringent requirements to determine whether
an applicant can meet the terms of an installment payment plan.
3. Rural Telephone Company Provisions
105. Background. In the Fifth Report and Order, the Commission established several
provisions to help rural telephone companies become meaningful participants in the emerging
PCS market. In that proceeding, we defined a rural telephone company as a local exchange
carrier having 100,000 or fewer access lines, including all affiliates. In departing from the
more restrictive definition adopted in the Second Report and Order, the Commission stated
that the revised definition strikes an appropriate balance by facilitating the rapid deployment of
broadband PCS to rural areas, without giving benefits to large companies that do not require
special assistance. Qualified rural telephone companies are eligible for broadband PCS
licenses through a partitioning system, which permits rural telephone companies to obtain
licenses that are geographically partitioned from larger PCS service areas. These companies
will be permitted to acquire partitioned broadband PCS licenses in any frequency block in two
ways: (1) they may form bidding consortia consisting entirely of rural telephone companies to
participate in the auctions, and then partition the licenses won among consortia participants;
and (2) they may acquire partitioned broadband PCS licenses from other licensees through
private negotiation and agreement either before or after the auction.
106. Under our rules, if a rural telephone company receives a partitioned license from
another PCS licensee in a post-auction transaction, the partitioned area must be reasonably
related to the rural telephone company's wireline service area that lies within the PCS service
area. We recognized in the Fifth Report and Order that rural telephone companies will require
some flexibility in fashioning areas in which they will receive partitioned licenses, so we did
not adopt a strict rule concerning the reasonableness of the partitioned area.
107. Petitions. Petitioners variously request the Commission modify our rural
telephone company provisions. Century Telephone Enterprises, Inc. (Century) and Citizens
Utilities Company (Citizens) argue that the rural telephone company definition adopted in the
Fifth Report and Order is overly restrictive and excludes local exchange carriers that exceed
the access line standard but nevertheless serve predominantly rural areas. Alternatively,
Citizens requests the Commission implement waiver procedures. In addition, Hicks and
Ragland and TEC urge the Commission to eliminate its partitioned service area limitations,
stating that the present rules unnecessarily impede the ability of a rural telephone company to
provide service in a technically and economically feasible manner. Finally, MEANS/SDN
and TEC contend that rural telephone companies should be afforded the same benefits as other
designated entities, including outside passive investment in rural telephone company consortia
and bidding credits.
108. Decision. We generally will retain the rural telephone company provisions
adopted in the Fifth Report and Order. We remain convinced that our definition of rural
telephone company, which reflects the views of numerous parties to this proceeding, will
ensure that broadband PCS will be deployed rapidly to rural areas. At the same time, it is
narrowly tailored to exclude large local exchange carriers that do not require special
treatment. We observe that we can entertain and grant a waiver request if a local exchange
carrier that does not satisfy our rural telephone company definition can meet our waiver
standard set forth in Section 24.819 of the Commission's Rules to warrant qualifying the LEC
for a partitioned broadband PCS license.
109. We continue to believe that our existing rules, which allow rural telephone
companies to obtain broadband PCS licenses that are geographically partitioned from larger
PCS service areas, will provide a viable opportunity for these entities to successfully acquire
PCS licenses and offer service to rural areas. We are confident that the partitioning system
articulated in the Fifth Report and Order satisfies the directive of Congress to ensure that rural
telephone companies have the opportunity to provide PCS services to all areas of the country,
including rural areas. In addition, we believe that the other benefits afforded to designated
entities, combined with the cellular attribution threshold for rural telephone companies adopted
in Gen. Docket No. 90-314, will further ensure that rural areas have expedient access to PCS
services.
110. We disagree with MEANS/SDN's contention that modifications to our consortia
provisions are needed to fulfill Congress' mandate that rural telephone companies have an
opportunity to acquire PCS licenses. As we noted in the Fifth Report and Order, we expect
that virtually all rural telephone company consortia will be eligible to bid on licenses in Blocks
C and F without competition from "deep pocket" bidders. Additionally, if consortia
members qualify as small businesses, the Commission will provide the bidding credit and
installment payment provisions extended to similarly-situated applicants. Accordingly, we
believe it is unnecessary to permit passive equity investments in rural telephone company
consortia, as MEANS/SDN request.
111. We also reject TEC's and MEANS/SDN's proposal to extend bidding credits to
rural telephone companies even if they are not small businesses or owned by minorities and/or
women. We continue to believe that existing benefits for rural telephone companies will allow
them to effectively compete for licenses that serve rural territories. In addition to the
partitioning and consortia provisions, we also note that rural telephone companies qualify for
significant financial benefits from the Rural Electrification Administration and the Universal
Service Fund which, as BET suggests, adequately compensates these entities for the lack of
bidding credits. Additionally, we note that our bidding credits were specifically tailored to
address the discriminatory market barriers faced by women and minority-owned entities. We
concur with BET's assessment that rural telephone companies do not face the same kinds of
barriers raising capital.
112. We note that most, if not all, rural telephone companies meet the entrepreneurs'
block size standards and are permitted to bid directly on entrepreneurs' blocks licenses. To
the extent that a rural telephone company does not qualify for the entrepreneurs' blocks,
however, we disagree that it will be forced to negotiate with other licensees that may not be
willing to sell their broadband PCS interests in the form of partitioned licenses or other
ownership arrangements. On the contrary, we believe that other applicants and licensees will
find rural telephone companies attractive entities to negotiate with, because of the efficiencies
associated with rural telephone companies existing infrastructure. Additionally, since a
licensee will be permitted to assign a portion of its license to a rural telephone company
without violating the transfer and holding requirements, we expect that licensees will actively
solicit participation by rural telephone companies. For the reasons discussed above, we
continue to believe that our existing scheme, which is narrowly tailored to satisfy Congress'
mandate, will provide rural telephone companies with a meaningful opportunity to participate
in the provision of broadband PCS services and further the objective of rapidly getting service
to rural areas.
113. Finally, we dismiss concerns raised by TEC and Hicks and Ragland concerning
the permissible size of a rural telephone company's service area. We addressed these concerns
in the Fifth Report and Order and concluded that a partitioned area containing no more than
twice the population of that portion of a rural telephone company's wireline service area
provides a reasonable presumption of a permissible service territory. However, we agree
that rural telephone companies will require some flexibility in fashioning a partitioned service
area and thereby affirm our prior conclusion that a strict rule is not needed.
E. Aggregation of and Holding Period for the Entrepreneurs' Block Licenses
a. Single Entity Purchase Limit
114. Background. To ensure that C and F block licenses are disseminated among a
wide variety of applicants, our rules as adopted in the Fifth Report and Order, restrict the
number of licenses within the entrepreneurs' block that a single entity may win at auction.
Specifically, we impose a limitation that no single entity may win more than 10 percent of the
licenses available in the entrepreneurs' blocks, or 98 licenses. We indicated that the 98
licenses may all be in frequency block C or all in frequency block F, or in some combination
of the two blocks. We observed that such a limit would ensure that at least 10 winning
bidders enjoy the benefits of the entrepreneurs' blocks, while also allowing bidders to
effectuate aggregation strategies that include large numbers of licenses and extensive
geographic coverage. We provided that the limit would apply only to the total number of
licenses that may be won at auction on the C and F blocks. Furthermore, we indicated that for
purposes of this restriction we will consider licenses to be won by the same entity if an
applicant (or other entity) that controls, or has the power to control licenses won at the
auction, controls or has the power to control another license at the auction.
115. Petitioners. On reconsideration, the Small Business PCS Association (SBPCS)
recommends that the maximum number of entrepreneurs' block licenses purchased by a single
entity be limited to licenses that cover no more than a total of 10 percent of the national
population, or approximately 25 million "pops." SBPCS expresses concern that the existing
limit does not provide for enough diversity of ownership since it would allow a single entity to
acquire the top 98 BTA licenses on the 30 MHz entrepreneurs' block.
116. Decision. After considering SBPCS' concerns, we will retain the existing limit,
which prevents any single entity from acquiring more than 10 percent of the entrepreneurs'
block licenses. We believe that changing the limit to 10 percent of the population or 25
million "pops" rule would be overly restrictive. We note, for example, that successful
entrepreneurs will need to form coherent regional "cluster" strategies to compete against large
communications companies, such as dominant cellular providers, and that such regional
clusters may come together into a national alliance with common technology and marketing
strategies, including a common brand name. A 25 million "pops" per entity limit would
severely restrict entrepreneurs that win the New York BTA (with 18 million "pops") and the
Los Angeles BTA (with 15 million "pops") from any meaningful regional cluster strategy,
given the size of adjoining markets. In light of this concern, we want to be careful not to
impose a restriction that would unfairly disadvantage C and F block new entrants in the new
PCS marketplace. We are satisfied that the present limit achieves the proper balance between
promoting fair distribution of benefits and ensuring that entrepreneur block winners have
enough flexibility to develop competitive systems on a regional and nationwide basis.
b. Restrictions on Transfer or Assignment
117. Background. In the Fifth Report and Order, restrictions on the transfer or
assignment of licenses were adopted to ensure that designated entities do not take advantage of
special entrepreneurs' block provisions by immediately assigning or transferring control of
their licenses to non-designated entities. We indicated that the "trafficking" of licenses in this
manner would unjustly enrich the auction winners and would undermine the congressional
objective of giving designated entities the opportunity to provide spectrum-based services.
Thus, our rules prohibit licensees in the entrepreneurs' blocks from voluntarily assigning or
transferring control of their licenses during the three years after the date of the license grant.
For the subsequent two years (or the fourth and fifth years of the term), the licensee is
permitted to assign or transfer control of its authorization only to an entity that satisfies the
entrepreneurs' blocks entry criteria.
118. We also provided that during the five-year period licensees cannot assign an
attributable interest in the license that would cause them to exceed the financial eligibility
requirements. Additionally, we stated that a transferee or assignee who receives a C or F
block license during the five-year holding period will remain subject to the transfer restrictions
for the balance of the holding period. Thus, if a C-block authorization is assigned to an
eligible business in year four of the license term, it will be required to hold that license until
the original five-year period expires, subject to the same exceptions that applied to the original
licensee. Moreover, we stated that we will conduct random pre- and post-auction audits to
ensure that applicants receiving preferences are in compliance with the Commission's rules.
119. In the Fifth Report and Order, we also adopted rules to prevent entrepreneur
block license holders from realizing any unjust enrichment that is gained through a transfer or
assignment that occurs during the original license term. Specifically, we provided that if,
within the original license term, a licensee applies to assign or transfer control of a license to
an entity that is not eligible for as high a level of bidding credit, then the difference between
the bidding credit obtained by the assigning party and the bidding credit for which the
acquiring party would qualify, must be paid to the U.S. Treasury as a condition of approval of
the transfer or assignment.
120. We adopted similar requirements with respect to repayment of installment
payments. Specifically, if a licensee that was awarded installment payments seeks to assign or
transfer control of its license during the term of a license to an entity not meeting the
applicable eligibility standards, we require payment of the remaining principal and any interest
accrued through the date of assignment as a condition of approval of the transfer or
assignment. Accordingly, we explained that if an entity seeks to assign or transfer control of a
license to an entity that does not qualify for as favorable an installment payment plan, the
installment payment plan, if any, for which the acquiring entity qualifies will become effective
immediately upon transfer or assignment of the license. Thus, a higher interest rate and
earlier payment of principal may begin to be applied.
121. Petitions. Two petitioners discussed the holding period and limited transfer
restrictions imposed on entrepreneurs' block licenses. Specifically, AIDE requests the
Commission repeal the five-year holding period, contending that the unjust enrichment
provisions (to the extent they promote recovery of bidding credits and installment payments)
eliminate the need for such a restriction. AIDE also argues that once a designated entity
receives a spectrum-based license, the mandate of Congress to provide these entities with a fair
opportunity to provide spectrum-based services is satisfied, and that there is no justification for
any further restrictions beyond that point in time. AIDE also wants clarification of how our
unjust enrichment provisions will apply if a transfer or assignment does occur during the five-year holding period.
122. Additionally, CTIA requests that the Commission amend its transfer restrictions
to allow all PCS licensees (including entrepreneurs' blocks and designated entities) to transfer
5 MHz of spectrum immediately after license grant. Alternatively, CTIA asks that transfer be
permitted within one year after service is initiated by a new PCS entrant in the relevant PCS
service area. CTIA contends that this change is needed to provide cellular carriers with
reasonable flexibility to reach the 40 MHz PCS spectrum cap (especially in secondary market
transactions), and may increase the value of spectrum at auction (i.e., by providing designated
entities with an added source of funding and ensuring that market forces place the spectrum in
the hands of those who value it most highly).
123. Decision. We will not modify our five-year holding period and limited transfer
restrictions. While AIDE and CTIA ask us to eliminate or significantly relax our restrictions,
many commenters generally support the idea of a holding and limited transfer period for
entrepreneurs' block licenses. BET, for example, contends that without a holding
requirement, the opportunities for circumventing the Commission's rules are increased as non-designated entities weigh the benefits of sacrificing certain preferences (e.g., bidding credits)
in exchange for control of a valuable PCS license. Contrary to AIDE's point of view, we
believe that unjust enrichment provisions alone do not provide adequate safeguards for
ensuring that designated entities retain de jure and de facto control over their licenses. We are
satisfied that the five-year holding period and limited transfer restrictions adopted in the Fifth
Report and Order are justified for our purposes in meeting our congressional mandate.
124. Additionally we reject CTIA's request to permit 5 MHz of spectrum to be
transferred after the license grant because it would contradict our determinations in the PCS
service rules docket (Gen. Docket 90-314) concerning the disaggregation of broadband PCS
spectrum. In that docket, we decided that no disaggregation of spectrum should be allowed
until a broadband PCS licensee had met our five-year construction requirements. We also
determined that in-region cellular interests should not be permitted to acquire 10 MHz of
broadband PCS spectrum until the year 2000 -- when they would be eligible for an additional 5
MHz of spectrum in their service areas. CTIA's proposal would permit disaggregation
sooner than is permissible under our PCS service rules, and should be rejected for reasons that
we have previously established.
125. In addition, we wish to clarify the application of our holding rule to our financial
caps. As we have stated, under certain circumstances we will allow licensees to retain their
eligibility during the holding period, even if the company has grown beyond our size
limitations for the entrepreneurs' block and for small business eligibility. Thus, we will
permit entrepreneurs' block licensees to transfer their licenses in years four through five to
other entrepreneurs' block licensees even if it would result in growth beyond the permissible
gross assets and total revenues caps, as long as it otherwise complies with our control group
and equity requirements. We believe this encourages designated entities to grow, instead of
penalizing them for their success, which was a concern expressed by some commenters.
126. Further, we clarify that between years four and five we will allow licensees to
transfer a license to any entity that either holds other entrepreneurs' block licenses (and thus at
the time of auction satisfied the entrepreneurs' block criteria) or that satisfies the criteria at the
time of transfer. Unjust enrichment penalties (as described above) apply if these requirements
are not met, or if they qualified for different provisions at the time of licensing. For purposes
of determining size eligibility for transfers or assignments that occur between the fourth and
fifth years, we will use the most recently available audited financial statements in cases where
the entity to whom the license is being transferred did not win a license in the original
entrepreneurs' block auction.
127. AIDE sought clarification concerning the application of our unjust enrichment
provisions to our holding period and limited transfer rules. In response to their request, we
reiterate that if a designated entity transfers or assigns its license before year five to a company
that qualifies for no bidding credit, then such a sale will entail full payment of the bidding
credit as a condition of transfer. If, however, the same transaction occurs (during the same
time frame), but the buyer is eligible for a lesser bidding credit, then the difference between
the bidding credit obtained by the seller and the bidding credit for which the buyer would
qualify, must be paid to the U.S. Treasury for the transaction to be approved by the FCC.
With respect to installment payments, we confirm that we expect that when the purchaser is
not to an entity that qualifies for any installment payment plan, we will require payment of the
unpaid balance in full before the sale will be approved.
F. Miscellaneous
1. Audits
128. In the Fifth Report and Order, we expressed our intention to conduct random pre-
and post-auction audits to ensure that designated entities retain de facto and de jure control of
their facilities and licenses and to ensure that all applicants receiving preferences are in
compliance with the eligibility requirements. On reconsideration, we clarify on our own
motion that the Commission's use of the term "random" in the Fifth Report and Order was
generic and that the Commission does not intend to limit itself to conducting "random" audits.
While random selection for audit may be one, acceptable enforcement technique in some cases,
it may not be the most efficient. We expect that audits might also be undertaken on
information received from third parties or on the basis of other factors. Since the audit
process will involve the application of in-house and contract resources, we intend to pursue a
course of audits that will be efficient as well as effective. Consequently, we are amending the
rules to more fully reflect the variety of circumstances that might lead to an audit. We will
also add an audit consent to the FCC short-form and other forms where eligibility must be
established. Because the Commission's audit program will cover all auction applications,
regardless of the service involved, we will promulgate conforming amendments to Subpart Q
in Part 1 of the Commission's regulations in a separate Order.
129. Audits and other enforcement vehicles are a necessary adjunct to a self-certification process to implement the measures to assist designated entities adopted pursuant
to Section 309(j) of the Communications Act. To facilitate our audit program and to provide
preliminary assurances that those applicants claiming eligibility for such preferences are in
compliance with the regulatory requirements concerning ownership and financial status, we
will require that applicants list their control group members, affiliates, attributable investors,
gross revenues, total assets and other basic ownership and eligibility information in an exhibit
to their short-form applications. Additional, more detailed information concerning eligibility
will be required of winning bidders. All applicants are required to maintain an updated file of
documentary evidence supporting the information and the status claimed. Applicants that do
not win the licenses for which they applied, shall maintain such records until final grant of the
license(s) in question, or one year from the date of the filing of their short-form applications,
whichever is earlier. Licensees shall maintain such records for the term of the license.
2. Defaults
130. Parties have asked questions about how the Commission would resolve issues
associated with an entrepreneurs' block licensee becoming financially insolvent. In particular,
there is concern about the status of the license when the licensee cannot make the required
installment payments, and in the case of when a licensee enters bankruptcy.
131. In the Second Report and Order, we clarified that "a designated entity that has
defaulted or that anticipates default under an installment payment program" may request a
three to six-month grace period before the Commission cancels its license.
"During this grace period, a defaulting licensee could maintain its
construction efforts and/or operations while seeking funds to continue
payments or seek from the Commission a restructured payment plan. We
will evaluate requests for a grace period on a case-by-case basis . . .
deciding whether to grant such requests or to pursue other measures, we
may consider, for example, the licensee's payment history, including
whether it has defaulted before and how far into the license term the
default occurs, the reasons for default, whether the licensee has met
construction build-out requirements, the licensee's financial condition,
and whether the licensee is seeking a buyer under a distress sale policy.
Following a grace period without successful resumption of payment or
upon denial of a grace period request, we will declare the license
cancelled and take appropriate measures under the Commission's debt
collection rules and procedures."
132. Since several commenters (discussed supra at note 287) requested clarification as
to what the Commission would allow in the event a licensee defaults on payment of its
installment monies, we clarify that lenders and entrepreneurs' block licensees are free to agree
contractually to their own terms regarding situations where the licensee has defaulted under the
Commission's installment payment program, and possibly other obligations. As long as there
is no transfer of control, we would not become involved in the particulars of a voluntary
workout arrangement between a designated entity and a third-party lender.
133. Specifically, an entrepreneurs' block licensee and its lenders may agree that, in
the event the licensee defaults on its installment payments, the lenders to that licensee will cure
this default by assuming the designated entity's payments to the government. Barring any
transfer of control, we would not object to such an arrangement.
134. In the event a transfer of control is sought under the terms of the workout, the
licensee and its lenders must apply for Commission approval of the transfer, in accordance
with Section 310(d) of the Communications Act. In a situation where the lender itself is the
proposed buyer or transferee, we would scrutinize such an application to determine whether,
by virtue of the loan agreement, an earlier transfer of control was effectuated. We clarify that
we would also expect that any requirements that arise by virtue of a licensee's status as an
entrepreneur or as a designated entity would be satisfied with respect to such a sale. Thus, for
example, the transfer would need to be to another qualified entrepreneur if it is to occur within
our five-year holding period.
135. In the event an entrepreneurs' block licensee becomes subject to bankruptcy, our
existing rules and precedent clarify how the Commission would dispose of a license in such a
circumstance. Specifically, transfer to a bankruptcy trustee is viewed as an involuntary
transfer or assignment to another party under Section 24.839 of the Commission's Rules. In
such a case therefore, there would be a pro forma involuntary assignment of the license to a
court-appointed trustee in bankruptcy, or to the licensee, as a debtor-in-possession. Assuming
the bankrupt estate is liquidated or the trustee finds a qualified purchaser for the licensee's
system, and assuming payments to the Commission are maintained or a grace period granted,
we will continue generally to defer to federal bankruptcy laws on many matters. We would,
however, ultimately have to approve any final transfer of the license. As stated above, we
would expect that any requirements that arise by virtue of a licensee's status as an
entrepreneur or as a designated entity would be satisfied with respect to such a sale. Thus, for
example, the transfer would need to be to another qualified entrepreneur if it is to occur within
our five-year holding period.
IV. PROCEDURAL MATTERS
A. Final Regulatory Flexibility Analysis
136. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C. § 604, the
Commission's final analysis for the Memorandum Opinion and Order is as follows:
Need for, and Purpose of, this Action. As a result of new statutory authority, the
Commission may utilize competitive bidding mechanisms in the granting of certain initial
licenses. The Commission published an Initial Regulatory Flexibility Analysis, see generally 5
U.S.C. § 603, in the Notice of Proposed Rule Making in this proceeding and published Final
Regulatory Flexibility Analyses in the Second Report and Order (at ¶¶ 299-302) and the Fifth
Report and Order (at ¶¶ 219-222). As noted in these previous final analyses, this proceeding
will establish a system of competitive bidding for choosing among certain applications for
initial licenses, and will carry out statutory mandates that certain designated entities, including
small entities, be afforded an opportunity to participate in the competitive bidding process and
in the provision of spectrum-based services.
Summary of the Issues Raised by the Public Comments. No commenters responded
specifically to the issues raised by the Fifth Report and Order. We have made some
modifications to the proposed requirements as appropriate.
Significant Alternatives Considered and Rejected. All significant alternatives have
been addressed in the Fifth Report and Order and in this Memorandum Opinion and Order.
B. Ordering Clauses
137. Accordingly, IT IS ORDERED that the Petitions for Reconsideration and/or
Clarification of the Fifth Report and Order in this proceeding ARE GRANTED to the extent
described above and DENIED in all other respects.
138. IT IS FURTHER ORDERED that the Petition for Rulemaking filed by David J.
Lieto on September 21, 1994 is hereby DISMISSED.
139. IT IS FURTHER ORDERED that the Petitions for Reconsideration of the Order
on Reconsideration, FCC 94-217, adopted in this proceeding ARE GRANTED to the extent
described above and DENIED in all other respects.
140. IT IS FURTHER ORDERED that Part 24 of the Commission's Rules IS
AMENDED as set forth in Appendix B.
141. IT IS FURTHER ORDERED that these rule changes made herein WILL
BECOME EFFECTIVE sixty (60) days after publication in the Federal Register. This action
is taken pursuant to Sections 4(i), 303(r) and 309(j) of the Communications Act of 1934, as
amended, 47 U.S.C. §§ 154(i), 303(r) and 309(j).
142. IT IS FURTHER ORDERED that the appropriate Bureau, in consultation with
the Managing Director, is delegated authority to revise FCC Forms 175, 401 (and any
successor forms) and to modify and create any additional forms to ensure that PCS applicants
are in compliance with the requirements set forth in Parts 1 and 24 of the Commission's Rules,
as amended.
FEDERAL COMMUNICATIONS COMMISSION
William F. Caton
Acting Secretary
Appendix A
List of Parties who Filed Petitions for Reconsideration of the
Fifth Report and Order in PP Docket 93-253
American Personal Communications (APC)
Association of Independent Designated Entities (AIDE)
BET Holdings, Inc. (BET)
Cellular Telecommunications Industry Association (CTIA)
Century Telephone Enterprises, Inc. (Century)
Citizens Utilities Company (Citizens)
Columbia PCS, Inc. (Columbia PCS)
Cook Inlet Region, Inc. (Cook Inlet)
EATELCORP, Inc. (EATEL)
GTE Service Corporation (GTE)
Hernandez, Roland A. (Hernandez)
Hicks and Ragland Engineering Company, Inc. (Hicks and Ragland)
Karl Brothers, Inc. (Karl Brothers)
Lehman Brothers (Lehman)
MasTec, Inc. (MasTec)
McCaw Cellular Communications, Inc. (McCaw)
Metrex Communications Group, Inc. (Metrex)
Minnesota Equal Access Network Services, Inc. and
South Dakota Network, Inc. (Joint) (MEANS/SDN)
National Association of Black Owned Broadcasters, Inc. (NABOB)
National Paging and Personal Communications Association (NPPCA)
Omnipoint Communications, Inc. (Omnipoint)
Pacific Bell Mobile Services (Pacific Bell)
Pacific Telecom Cellular, Inc.(PTC)
Small Business PCS Association (SBPCS)
Telephone Electronics Corporation (TEC)
United States Interactive & Microwave Television Association (USIMTA)
Oppositions filed in Response to Petitions for Reconsideration
Association of Independent Designated Entities (AIDE)
American Personal Communications (APC)
BET Holdings, Inc. (BET)
Columbia PCS, Inc. (Columbia)
Cook Inlet Region, Inc. (Cook)
DCR Communications, Inc. (DCR)
Encompass, Inc. (Encompass)
Mankato Citizens Telephone Co. (Mankato)
MasTec (MasTec)
McCaw Cellular Communications, Inc. (McCaw)
Minnesota Equal Access Network Services, Inc. and South Dakota Network, Inc.
Omnipoint Communications, Inc. (Omnipoint)
Pacific Bell Mobile Services (PacBell)
Personal Communications Industry Association (PCIA)
Telephone and Data Systems, Inc. (TDS)
United States Telephone Association (USTA)
Vanguard Cellular Systems, Inc. (Vanguard)
Replies filed in Response to Petitions for Reconsideration
BET Holdings, Inc. (BET)
City of Dallas (Dallas)
GO Communications Corporation (formerly Columbia PCS, Inc.) (Columbia PCS)
McCaw Cellular Communications, Inc. (McCaw)
Minnesota Equal Access Equal Access Network Services, Inc.
and South Dakota Network, Inc. (Minnesota)
National Paging & Personal Communications Association (NPPCA)
Omnipoint Communications (Omnipoint)
Small Business Administration (SBA)
Ex parte filings in Response to Fifth Report and Order
Airtouch Communications (Airtouch)
Allied Communications, L.P.
Bachow & Associates
Bastion Capital Fund, L.P., LM Capital Fund II, L.P.
BellSouth Corporation (BellSouth)
BET Holdings, Inc. (BET)
Cellular Telecommunications Industry Association (CTIA)
Columbia PCS/Go Communications (Columbia/GO)
Columbus Grove Telephone Co. (CGTC)
Comcast Corp. (Comcast)
Congress of the United States
Cook Inlet Communications (Cook Inlet)
Cox Enterprises, Inc. (Cox)
DCR Communications (DCR)
EATELCORP, Inc. (EATEL)
Encompass, Inc. (Encompass)
Fidelity Capital
Fleischman and Walsh (F&W)
GTE Service Corporation (GTE)
Gurman et al. (Gurman)
Hart Engineers (Hart)
Hernandez, Roland, Interspan Communications, Corp.
Impulse Telecommuncations, Corp. (Impulse)
In-Flight Phone International (In-Flight)
Jordan, Vernon E.
Kraskin & Associates (Kraskin)
Lehman Brothers (Lehman)
Marshall Company (Forming New Communications Services, Inc. [NEWCOM])
MasTec, Inc. (MasTec)
Media Communications Partners (Providence, Fleet Equity, Spectrum)
Metro-Sound, USA (L.A. Sound)
Minority Business Enterprise Legal Defense and Education Fund, Inc. (MBELDEF)
Minority Media Ownership & Employment Council (MMOEC)
Montgomery Securities (Montgomery)
NationsBank and NationsBanc Capital Markets, Inc. (NationsBank)
North American Wireless, Incorporated
Murray, James B. Jr.
National Rainbow Coalition
Omnipoint Corporation (Omnipoint)
Pacific Bell (Pac Bell)
Pacific Telesis
Rakolta, Terry
Skadden, Arps, Slate, Meagher & Flom
Small Business Administration (SBA)
Small Business Advisory Committee (SBAC)
Small Business PCS Association (SBPCSA)
Telephone Electronics Corporation (TEC)
Unterberg Harris
U.S. Intelco Networks, Inc. (USIN)
Utilities, Inc. (Utilities)
Vanguard Cellular Systems, Inc. (Vanguard)
Venture Capital Representatives: The Carlyle Group, Daniels & Associates, Fleet Equity
Partners, Madison Dearborn, MC Partners, Providence Ventures Inc., Spectrum Equity
Investors. (Venture Capital Representatives)
Wiley, Rein & Fielding
Appendix B
Amended Rules
Part 24 of Chapter I of Title 47 of the Code of Federal Regulations is amended in Subpart H
and I as follows:
1. Section 24.709 is revised to read as follows:
§ 24.709 Eligibility for licenses for frequency Blocks C and F.
(a) General Rule.
(1) No application is acceptable for filing and no license shall be granted for frequency
block C or frequency block F, unless the applicant, together with its affiliates and persons or
entities that hold interests in the applicant and their affiliates, have gross revenues of less than
$125 million in each of the last two years and total assets of less than $500 million at the time
the applicant's short-form application (Form 175) is filed.
(2) The gross revenues and total assets of the applicant (or licensee), and its affiliates,
and (except as provided in paragraph (b) of this section) of persons or entities that hold
interests in the applicant (or licensee), and their affiliates, shall be attributed to the applicant
and considered on a cumulative basis and aggregated for purposes of determining whether the
applicant (or licensee) is eligible for a license for frequency block C or frequency block F
under this section.
(3) Any licensee awarded a license pursuant to this section (or pursuant to
§ 24.839(d)(2)) shall maintain its eligibility until at least five years from the date of initial
license grant, except that a licensee's (or other attributable entity's) increased gross revenues
or increased total assets due to nonattributable equity investments (i.e., from sources whose
gross revenues and total assets are not considered under paragraph (b) of this section), debt
financing, revenue from operations or other investments, business development or expanded
service shall not be considered.
(b) Exceptions to General Rule.
(1) Small Business Consortia. Where an applicant (or licensee) is a consortium of small
businesses, the gross revenues and total assets of each small business shall not be aggregated.
(2) Publicly-Traded Corporations. Where an applicant (or licensee) is a publicly traded
corporation with widely dispersed voting power, the gross revenues and total assets of a
person or entity that holds an interest in the applicant (or licensee), and its affiliates, shall not
be considered.
(3) 25 Percent Equity Exception. The gross revenues and total assets of a person or
entity that holds an interest in the applicant (or licensee), and its affiliates, shall not be
considered so long as:
(i) Such person or entity, together with its affiliates, holds only nonattributable equity
equaling no more than 25 percent of the applicant's (or licensee's) total equity;
(ii) Except as provided in paragraph (b)(5) of this section, such person or entity is not a
member of the applicant's (or licensee's) control group; and
(iii) The applicant (or licensee) has a control group that complies with the minimum
equity requirements of paragraph (b)(5) of this section, and, if the applicant (or licensee) is a
corporation, owns at least 50.1 percent of the applicant's (or licensee's) voting interests, and,
if the applicant (or licensee) is a partnership, holds all of its general partnership interests.
(4) 49.9 Percent Equity Exception. The gross revenues and total assets of a person or
entity that holds an interest in the applicant (or licensee), and its affiliates, shall not be
considered so long as:
(i) Such person or entity, together with its affiliates, holds only nonattributable equity
equaling no more than 49.9 percent of the applicant's (or licensee's) total equity;
(ii) Except as provided in paragraph (b)(6) of this section, such person or entity is not a
member of the applicant's (or licensee's) control group; and
(iii) The applicant (or licensee) has a control group that complies with the minimum
equity requirements of paragraph (b)(6) of this section and, if the applicant (or licensee) is a
corporation, owns at least 50.1 percent of the applicant's (or licensee's) voting interests, and,
if the applicant (or licensee) is a partnership, holds all of its general partnership interests.
(5) Control Group Minimum 25 Percent Equity Requirement. In order to be eligible to
exclude gross revenues and total assets of persons or entities identified in paragraph (b)(3) of
this section, an applicant (or licensee) must comply with the following requirements:
(i) Except for an applicant (or licensee) whose sole control group member is a
preexisting entity, as provided in paragraph (b)(5)(ii) of this section, at the time the applicant's
short-form application (Form 175) is filed and until at least three years following the date of
initial license grant, the applicant's (or licensee's) control group must own at least 25 percent
of the applicant's (or licensee's) total equity as follows:
(A) At least 15 percent of the applicant's (or licensee's) total equity must be
held by qualifying investors, either unconditionally or in the form of options exercisable, at the
option of the holder, at any time and at any exercise price equal to or less than the market
value at the time the applicant files its short-form application (Form 175);
(B) Such qualifying investors must hold 50.1 percent of the voting stock and all
general partnership interests within the control group, and must have de facto control of the
control group and of the applicant;
(C) The remaining 10 percent of the applicant's (or licensee's) total equity may
be owned by qualifying investors, either unconditionally or in the form of stock options not
subject to the restrictions of paragraph (b)(5)(i)(A) of this section, or by any of the following
entitites, which may not comply with section 24.720(n)(1):
(1) Institutional investors, either unconditionally or in the form of stock options;
(2) Noncontrolling existing investors in any preexisting entity that is a member
of the control group, either unconditionally or in the form of stock options; or
(3) Individuals that are members of the applicant's (or licensee's) management,
either unconditionally or in the form of stock options.
(D) Following termination of the three-year period specified in paragraph
(b)(5)(i) of this section, qualifying investors must continue to own at least 10 percent of the
applicant's (or licensee's) total equity, either unconditionally or in the form of stock options
subject to the restrictions in paragraph (b)(5)(i)(A) of this section. The restrictions specified in
paragraph (b)(5)(i)(C)(1)-(4) of this section no longer apply to the remaining equity after
termination of such three-year period.
(ii) At the election of an applicant (or licensee) whose control group's sole member is a
preexisting entity, the 25 percent minimum equity requirements set forth in paragraph (b)(5)(i)
of this section shall apply, except that only 10 percent of the applicant's (or licensee's) total
equity must be held by qualifying investors and that the remaining 15 percent of the applicant's
(or licensee's) total equity may be held by qualifying investors or noncontrolling existing
investors in such control group member or individuals that are members of the applicant's (or
licensee's) management. These restrictions on the identity of the holder(s) of the remaining 15
percent of the licensee's total equity no longer apply after termination of the three-year period
specified in paragraph (b)(5)(i) of this section.
(6) Control Group Minimum 50.1 Percent Equity Requirement. In order to be eligible
to exclude gross revenues and total assets of persons or entities identified in paragraph (b)(4)
of this section, an applicant (or licensee) must comply with the following requirements:
(i) Except for an applicant (or licensee) whose sole control group member is a
preexisting entity, as provided in paragraph (b)(6)(ii) of this section, at the time the applicant's
short-form application (Form 175) is filed and until at least three years following the date of
initial license grant, the applicant's (or licensee's) control group must own at least 50.1
percent of the applicant's (or licensee's) total equity as follows:
(A) At least 30 percent of the applicant's (or licensee's) total equity must be
held by qualifying minority and/or women investors, either unconditionally or in the form of
options exercisable, at the option of the holder, at any time and at any exercise price equal to
or less than the market value at the time the applicant files its short-form application (Form
175);
(B) Such qualifying minority and/or women investors must hold 50.1 percent of
the voting stock and all general partnership interests within the control group and must have de
facto control of the control group and of the applicant;
(C) The remaining 20.1 percent of the applicant's (or licensee's) total equity
may be owned by qualifying investors, either unconditionally or in the form of stock options
not subject to the restrictions of paragraph (b)(5)(i)(A) of this section, or by any of the
following entitites, which may not comply with section 24.720(n)(1):
(1) Institutional investors, either unconditionally or in the form of stock options;
(2) Noncontrolling existing investors in any preexisting entity that is a member
of the control group, either unconditionally or in the form of stock options; or
(3) Individuals that are members of the applicant's (or licensee's) management,
either unconditionally or in the form of stock options.
(D) Following termination of the three-year period specified in paragraph
(b)(6)(i) of this section, qualifying minority and/or women investors must continue to own at
least 20 percent of the applicant's (or licensee's) total equity, either unconditionally or in the
form of stock options subject to the restrictions in paragraph (b)(6)(i)(A) of this section. The
restrictions specified in paragraph (b)(6)(i)(C)(1)-(4) of this section no longer apply to the
remaining equity after termination of such three-year period.
(ii) At the election of an applicant (or licensee) whose control group's sole member is a
preexisting entity, the 50.1 percent minimum equity requirements set forth in paragraph
(b)(6)(i) of this section shall apply, except that only 20 percent of the applicant's (or
licensee's) total equity must be held by qualifying minority and/or women investors and that
the remaining 30.1 percent of the applicant's (or licensee's) total equity may be held by
qualifying minority and/or women investors or noncontrolling existing investors in such control
group member or individuals that are members of the applicant's (or licensee's) management.
These restrictions on the identity of the holder(s) of the remaining 30.1 percent of the
licensee's total equity no longer apply after termination of the three-year period specified in
paragraph (b)(6)(i) of this section.
(7) Calculation of Certain Interests. Except as provided in paragraphs (b)(5) and (b)(6)
of this section, ownership interests shall be calculated on a fully diluted basis; all agreements
such as warrants, stock options and convertible debentures will generally be treated as if the
rights thereunder already have been fully exercised, except that such agreements may not be
used to appear to terminate or divest ownership interests before they actually do so, in order to
comply with the nonattributable equity requirements in paragraphs (b)(3)(i) and (b)(4)(i) of
this section.
(8) Aggregation of Affiliate Interests. Persons or entities that hold interests in an
applicant (or licensee) that are affiliates of each other or have an identity of interests identified
in § 24.720(l)(3) will be treated as though they were one person or entity and their ownership
interests aggregated for purposes of determining an applicant's (or licensee's) compliance with
the nonattributable equity requirements in paragraphs (b)(3)(i) and (b)(4)(i) of this section.
Example 1: ABC Corp. is owned by individuals, A, B, and C, each having an equal
one-third voting interest in ABC Corp. A and B together, with two-thirds of the stock have
the power to control ABC Corp. and have an identity of interest. If A and B invest in DE
Corp., a broadband PCS applicant for block C, A and B's separate interests in DE Corp. must
be aggregated because A and B are to be treated as one person.
Example 2: ABC Corp. has a subsidiary BC Corp., of which it holds a controlling 51
percent of the stock. If ABC Corp. and BC Corp., both invest in DE Corp., their separate
interests in DE Corp. must be aggregated because ABC Corp. and BC Corp. are affiliates of
each other.
(c) Short-form and Long-Form Applications: Certifications and Disclosure.
(1) Short-form Application. In addition to certifications and disclosures required by
Part 1, subpart Q of the this Chapter and § 24.813, each applicant for a license for frequency
Block C or frequency Block F shall certify on its short-form application (Form 175) that it is
eligible to bid on and obtain such license(s), and (if applicable) that it is eligible for designated
entity status pursuant to this section and § 24.720, and shall append the following information
as an exhibit to its Form 175:
(i) For an applicant that is a publicly traded corporation with widely disbursed voting
power:
(A) A certified statement that such applicant complies with the requirements of
the definition of publicly traded corporation with widely disbursed voting power set forth in §
24.720(m);
(B) The identity of each affiliate of the applicant if not disclosed pursuant to §
24.813; and
(C) The applicant's gross revenues and total assets, computed in accordance
with paragraphs (a) and (b) of this section.
(ii) For all other applicants:
(A) The identity of each member of the applicant's control group, regardless of
the size of each member's total interest in the applicant, and the percentage and type of interest
held;
(B) The citizenship and the gender or minority group classification for each
member of the applicant's control group if the applicant is claiming status as a business owned
by members of minority groups and/or women;
(C) The status of each control group member that is an institutional investor, an
existing investor, and/or a member of the applicant's management;
(D) The identity of each affiliate of the applicant and each affiliate of
individuals or entities identified pursuant to paragraphs (c)(1)(ii)(A) and (c)(1)(ii)(C) of this
section if not disclosed pursuant to § 24.813;
(E) A certification that the applicant's sole control group member is a
preexisting entity, if the applicant makes the election in either paragraph (b)(5)(ii) or (b)(6)(ii)
of this section; and
(F) The applicant's gross revenues and total assets, computed in accordance
with paragraphs (a) and (b) of this section.
(iii) For each applicant claiming status as a small business consortium, the information
specified in paragraph (c)(1)(ii) of this section, for each member of such consortium.
(2) Long-form Application. In addition to the requirements in subpart I of this part and
other applicable rules (e.g., §§ 24.204(f), 20.6(e), 20.9(b)), each applicant submitting a long-form application for license(s) for frequency blocks C and F shall, in an exhibit to its long-form application:
(i) Disclose separately and in the aggregate the gross revenues and total assets,
computed in accordance with paragraphs (a) and (b) of this section, for each of the following:
the applicant; the applicant's affiliates; the applicant's control group members; the applicant's
attributable investors; and affiliates of its attributable investors;
(ii) List and summarize all agreements or other instruments (with appropriate
references to specific provisions in the text of such agreements and instruments) that support
the applicant's eligibility for a license(s) for frequency Block C or frequency Block F and its
eligibility under §§ 24.711 through 24.720, including the establishment of de facto and de
jure control; such agreements and instruments include articles of incorporation and bylaws,
shareholder agreements, voting or other trust agreements, partnership agreements,
management agreements, joint marketing agreements, franchise agreements, and any other
relevant agreements (including letters of intent), oral or written; and
(iii) List and summarize any investor protection agreements and identify specifically
any such provisions in those agreements identified pursuant to paragraph (c)(2)(ii) of this
section, including rights of first refusal, supermajority clauses, options, veto rights, and rights
to hire and fire employees and to appoint members to boards of directors or management
committees.
(3) Records Maintenance. All applicants, including those that are winning bidders,
shall maintain at their principal place of business an updated file of ownership, revenue and
asset information, including those documents referenced in paragraphs (c)(2)(ii) and (c)(2)(iii)
of this section and any other documents necessary to establish eligibility under this section or
under the definitions of small business and/or business owned by members of minority groups
and/or women. Licensees (and their successors in interest) shall maintain such files for the
term of the license. Applicants that do not obtain the license(s) for which they applied shall
maintain such files until the grant of such license(s) is final, or one year from the date of the
filing of their short-form application(s) (Form 175), whichever is earlier.
(d) Audits.
(1) Applicants and licensees claiming eligibility under this section or §§ 24.711
through 24.720 shall be subject to audits by the Commission, using in-house and contract
resources. Selection for audit may be random, on information, or on the basis of other
factors.
(2) Consent to such audits is part of the certification included in the short-form
application (Form 175). Such consent shall include consent to the audit of the applicant's or
licensee's books, documents and other material (including accounting procedures and
practices) regardless of form or type, sufficient to confirm that such applicant's or licensee's
representations are, and remain, accurate. Such consent shall include inspection at all
reasonable times of the facilities, or parts thereof, engaged in providing and transacting
business, or keeping records regarding licensed broadband PCS service and shall also include
consent to the interview of principals, employees, customers and suppliers of the applicant or
licensee.
(e) Definitions. The terms affiliate, business owned by members of minority groups and
women, consortium of small businesses, control group, existing investor, gross revenues,
institutional investor, members of minority groups, nonattributable equity, preexisting entity,
publicly traded corporation with widely dispersed voting power, qualifying investor, qualifying
minority and/or woman investor, and total assets used in this section are defined in § 24.720.
2. Section 24.711 is amended to read as follows:
§ 24.711 Upfront payments, down payments and installment payments for licenses for
frequency Blocks C and F.
(a) Upfront Payments and Down Payments.
(1) Each eligible bidder for licenses on frequency Blocks C or F subject to auction shall
pay an upfront payment of $0.015 per MHz per pop for the maximum number of licenses (in
terms of MHz-pops) on which it intends to bid pursuant to § 1.2106 of this Chapter and
procedures specified by Public Notice.
(2) Each winning bidder shall make a down payment equal to ten percent of its winning
bid (less applicable bidding credits); a winning bidder shall bring its total amount on deposit
with the Commission (including upfront payment) to five percent of its net winning bid within
five business days after the auction closes, and the remainder of the down payment (five
percent) shall be paid within five business days after the application required by § 24.809(b) is
granted.
(b) Installment Payments. Each eligible licensee of frequency Block C or F may pay the
remaining 90 percent of the net auction price for the license in installment payments pursuant
to § 1.2110(e) of this Chapter and under the following terms:
(1) For an eligible licensee with gross revenues exceeding $75 million (calculated in
accordance with § 24.709(a)(2) and (b)) in each of the two preceding years (calculated in
accordance with 24.720(f)), interest shall be imposed based on the rate for ten-year U.S.
Treasury obligations applicable on the date the license is granted, plus 3.5 percent; payments
shall include both principal and interest amortized over the term of the license.
(2) For an eligible licensee with gross revenues not exceeding $75 million (calculated
in accordance with § 24.709(a)(2) and (b)) in each of the two preceding years, interest shall be
imposed based on the rate for ten-year U.S. Treasury obligations applicable on the date the
license is granted, plus 2.5 percent; payments shall include interest only for the first year and
payments of interest and principal amortized over the remaining nine years of the license term.
(3) For an eligible licensee that qualifies as a small business or as a consortium of
small businesses, interest shall be imposed based on the rate for ten-year U.S. Treasury
obligations applicable on the date the license is granted, plus 2.5 percent; payments shall
include interest only for the first two years and payments of interest and principal amortized
over the remaining eight years of the license term.
(4) For an eligible licensee that qualifies as a business owned by members of minority
groups and/or women, interest shall be imposed based on the rate for ten-year U.S. Treasury
obligations applicable on the date the license is granted; payments shall include interest only
for the first three years and payments of interest and principal amortized over the remaining
seven years of the license term.
(5) For an eligible licensee that qualifies as a small business owned by members of
minority groups and/or women or as a consortium of small business owned by members of
minority groups and/or women, interest shall be imposed based on the rate for ten-year U.S.
Treasury obligations applicable on the date the license is granted; payments shall include
interest only for the first six years and payments of interest and principal amortized over the
remaining four years of the license term.
(c) Unjust Enrichment.
(1) If a licensee that utilizes installment financing under this section seeks to assign or
transfer control of its license to an entity not meeting the eligibility standards for installment
payments, the licensee must make full payment of the remaining unpaid principal and any
unpaid interest accrued through the date of assignment or transfer as a condition of approval.
(2) If a licensee that utilizes installment financing under this section seeks to make any
change in ownership structure that would result in the licensee losing eligibility for installment
payments, the licensee shall first seek Commission approval and must make full payment of
the remaining unpaid principal and any unpaid interest accrued through the date of such
change as a condition of approval. A licensee's (or other attributable entity's) increased gross
revenues or increased total assets due to nonattributable equity investments (i.e., from sources
whose gross revenues and total assets are not considered under § 24.709(b)), debt
financing, revenue from operations or other investments, business development or expanded
service shall not be considered to result in the licensee losing eligibility for installment
payments.
(3) If a licensee seeks to make any change in ownership that would result in the
licensee qualifying for a less favorable installment plan under this section, the licensee shall
seek Commission approval and must adjust its payment plan to reflect its new eligibility status.
A licensee may not switch its payment plan to a more favorable plan.
3. Section 24.712 is amended by revising paragraph (d) to read as follows:
§ 24.712 Bidding credits for licenses for frequency Blocks C and F.
* * * * *
(d) Unjust Enrichment.
(1) If during the term of the initial license grant (see § 24.15), a licensee that utilizes a
bidding credit under this section seeks to assign or transfer control of its license to an entity
not meeting the eligibility standards for bidding credits or seeks to make any other change in
ownership that would result in the licensee no longer qualifying for bidding credits under this
section, the licensee must seek Commission approval and reimburse the government for the
amount of the bidding credit as a condition of the approval of such assignment, transfer or
other ownership change.
(2) If during the term of the initial license grant (see § 24.15), a licensee that utilizes a
bidding credit under this section seeks to assign or transfer control of its license to an entity
meeting the eligibility standards for lower bidding credits or seeks to make any other change in
ownership that would result in the licensee qualifying for a lower bidding credit under this
section, the licensee must seek Commission approval and reimburse the government for the
difference between the amount of the bidding credit obtained by the licensee and the bidding
credit for which the assignee, transferee or licensee is eligible under this section as a condition
of the approval of such assignment, transfer or other ownership change.
4. Section 24.720 is revised to read as follows:
§ 24.720 Definitions.
(a) Scope. The definitions in this section apply to §§ 24.709 through 24.714, unless otherwise
specified in those sections.
(b) Small Business; Consortium of Small Businesses.
(1) A small business is an entity that, together with its affiliates and persons or entities
that hold interests in such entity and their affiliates, has average annual gross revenues that are
not more than $40 million for the preceding three years.
(2) For purposes of determining whether an entity meets the $40 million average annual
gross revenues size standard set forth in paragraph (b)(1) of this section, the gross revenues of
the entity, its affiliates, persons or entities holding interests in the entity and their affiliates
shall be considered on a cumulative basis and aggregated, subject to the exceptions set forth in
§ 24.709(b).
(3) A small business consortium is a conglomerate organization formed as a joint
venture between or among mutually-independent business firms, each of which individually
satisfies the definition of a small business in paragraphs (b)(1) and (b)(2) of this section.
(c) Business Owned by Members of Minority Groups and/or Women. A business owned by
members of minority groups and/or women is an entity:
(1) In which the qualifying investor members of an applicant's control group are
members of minority groups and/or women who are United States citizens; and
(2) That complies with the requirements of § 24.709(b)(3) and (b)(5) or
§ 24.709(b)(4) and (b)(6).
(d) Small Business Owned by Members of Minority Groups and/or Women; Consortium of
Small Businesses Owned by Members of Minority Groups and/or Women. A small business
owned by members of minority groups and/or women is an entity that meets the definitions in
both paragraphs (b) and (c) of this section. A consortium of small businesses owned by
members of minority groups and/or women is a conglomerate organization formed as a joint
venture between mutually-independent business firms, each of which individually satisfies the
definitions in paragraphs (b) and (c) of this section.
(e) Rural Telephone Company. A rural telephone company is a local exchange carrier having
100,000 or fewer access lines, including all affiliates.
(f) Gross Revenues. Gross revenues shall mean all income received by an entity, whether
earned or passive, before any deductions are made for costs of doing business (e.g. cost of
goods sold), as evidenced by audited financial statements for the relevant number of calendar
years preceding January 1, 1994, or, if audited financial statements were not prepared on a
calendar-year basis, for the most recently completed fiscal years preceding the filing of the
applicant's short-form application (Form 175). For short-form applications filed after
December 31, 1995, gross revenues shall be evidenced by audited financial statements for the
preceding relevant number of calendar or fiscal years. If an entity was not in existence for all
or part of the relevant period, gross revenues shall be evidenced by the audited financial
statements of the entity's predecessor-in-interest or, if there is no identifiable predecessor-in-interest, unaudited financial statements certified by the applicant as accurate.
(g) Total assets. Total assets shall mean the book value (except where generally accepted
accounting principles (GAAP) require market valuation) of all property owned by an entity,
whether real or personal, tangible or intangible, as evidenced by the most recent audited
financial statements.
(h) Institutional Investor. An institutional investor is an insurance company, a bank holding
stock in trust accounts through its trust department, or an investment company as defined in 15
U.S.C. § 80a-3(a), including within such definition any entity that would otherwise meet the
definition of investment company under 15 U.S.C. § 80a-3(a) but is excluded by the
exemptions set forth in 15 U.S.C. § 80a-3(b) and (c), without regard to whether such entity is
an issuer of securities; provided that, if such investment company is owned, in whole or in
part, by other entities, such investment company, such other entities and the affiliates of such
other entities, taken as a whole, must be primarily engaged in the business of investing,
reinvesting or trading in securities or in distributing or providing investment management
services for securities.
(i) Members of Minority Groups. Members of minority groups includes Blacks, Hispanics,
American Indians, Alaskan Natives, Asians, and Pacific Islanders.
(j) Nonattributable Equity.
(1) Nonattributable equity shall mean:
(i) For corporations, voting stock or non-voting stock that includes no more
than twenty-five percent of the total voting equity, including the right to vote such stock
through a voting trust or other arrangement;
(ii) For partnerships, joint ventures and other non-corporate entities, limited
partnership interests and similar interests that do not afford the power to exercise control of
the entity.
(2) For purposes of assessing compliance with the equity limits in § 24.709(b)(3)(i) and
(b)(4)(i), where such interests are not held directly in the applicant, the total equity held by a
person or entity shall be determined by successive multiplication of the ownership percentages
for each link in the vertical ownership chain.
(k) Control Group. A control group is an entity, or a group of individuals or entities, that
possesses de jure control and de facto control of an applicant or licensee, and as to which the
applicant's or licensee's charters, bylaws, agreements and any other relevant documents (and
amendments thereto) provide:
(1) That the entity and/or its members own unconditionally at least 50.1 percent of the
total voting interests of a corporation;
(2) That the entity and/or its members receive at least 50.l percent of the annual
distribution of any dividends paid on the voting stock of a corporation;
(3) That, in the event of dissolution or liquidation of a corporation, the entity and/or its
members are entitled to receive 100 percent of the value of each share of stock in its
possession and a percentage of the retained earnings of the concern that is equivalent to the
amount of equity held in the corporation; and
(4) That, for other types of businesses, the entity and/or its members have the right to
receive dividends, profits and regular and liquidating distributions from the business in
proportion to the amount of equity held in the business.
Note: Voting control does not always assure de facto control, such as, for example,
when the voting stock of the control group is widely dispersed (see, e.g., § 24.720(l)(2)(iii)).
(l) Affiliate.
(1) Basis for Affiliation. An individual or entity is an affiliate of an applicant or of a
person holding an attributable interest in an applicant (both referred to herein as "the
applicant") if such individual or entity :
(i) Directly or indirectly controls or has the power to control the applicant, or
(ii) Is directly or indirectly controlled by the applicant, or
(iii) Is directly or indirectly controlled by a third party or parties that also controls or
has the power to control the applicant, or
(iv) Has an "identity of interest" with the applicant.
(2) Nature of control in determining affiliation.
(i) Every business concern is considered to have one or more parties who directly or
indirectly control or have the power to control it. Control may be affirmative or negative and
it is immaterial whether it is exercised so long as the power to control exists.
Example. An applicant owning 50 percent of the voting stock of another concern would
have negative power to control such concern since such party can block any action of the other
stockholders. Also, the bylaws of a corporation may permit a stockholder with less than 50
percent of the voting stock to block any actions taken by the other stockholders in the other
entity. Affiliation exists when the applicant has the power to control a concern while at the
same time another person, or persons, are in control of the concern at the will of the party or
parties with the power to control.
(ii) Control can arise through stock ownership; occupancy of director, officer or key
employee positions; contractual or other business relations; or combinations of these and other
factors. A key employee is an employee who, because of his/her position in the concern, has
a critical influence in or substantive control over the operations or management of the concern.
(iii) Control can arise through management positions where a concern's voting stock is
so widely distributed that no effective control can be established.
Example. In a corporation where the officers and directors own various size blocks of
stock totaling 40 percent of the corporation's voting stock, but no officer or director has a
block sufficient to give him or her control or the power to control and the remaining 60
percent is widely distributed with no individual stockholder having a stock interest greater than
10 percent, management has the power to control. If persons with such management control
of the other entity are persons with attributable interests in the applicant, the other entity will
be deemed an affiliate of the applicant.
(3) Identity of interest between and among persons. Affiliation can arise between or
among two or more persons with an identity of interest, such as members of the same family
or persons with common investments. In determining if the applicant controls or is controlled
by a concern, persons with an identity of interest will be treated as though they were one
person.
Example 1. Two shareholders in Corporation Y each have attributable interests in the
same PCS application. While neither shareholder has enough shares to individually control
Corporation Y, together they have the power to control Corporation Y. The two shareholders
with these common investments (or identity in interest) are treated as though they are one
person and Corporation Y would be deemed an affiliate of the applicant.
Example 2. One shareholder in Corporation Y, shareholder A, has an attributable
interest in a PCS application. Another shareholder in Corporation Y, shareholder B, has a
nonattributable interest in the same PCS application. While neither shareholder has enough
shares to individually control Corporation Y, together they have the power to control
Corporation Y. Through the common investment of shareholders A and B in the PCS
application, Corporation Y would still be deemed an affiliate of the applicant.
(i) Spousal Affiliation. Both spouses are deemed to own or control or have the power
to control interests owned or controlled by either of them, unless they are subject to a legal
separation recognized by a court of competent jurisdiction in the United States.
(ii) Kinship Affiliation. Immediate family members will be presumed to own or control
or have the power to control interests owned or controlled by other immediate family
members. In this context "immediate family member" means father, mother, husband, wife,
son, daughter, brother, sister, father- or mother-in-law, son- or daughter-in-law, brother- or
sister-in-law, step-father or -mother, step-brother or -sister, step-son or -daughter, half brother
or sister. This presumption may be rebutted by showing that
(A) The family members are estranged,
(B) The family ties are remote, or
(C) The family members are not closely involved with each other in business matters.
Example. A owns a controlling interest in Corporation X. A's sister-in-law, B, has an
attributable interest in a PCS application. Because A and B have a presumptive kinship
affiliation, A's interest in Corporation X is attributable to B, and thus to the applicant, unless
B rebuts the presumption with the necessary showing.
(4) Affiliation through stock ownership.
(i) An applicant is presumed to control or have the power to control a concern if he or
she owns or controls or has the power to control 50 percent or more of its voting stock.
(ii) An applicant is presumed to control or have the power to control a concern even
though he or she owns, controls or has the power to control less than 50 percent of the
concern's voting stock, if the block of stock he or she owns, controls or has the power to
control is large as compared with any other outstanding block of stock.
(iii) If two or more persons each owns, controls or has the power to control less than
50 percent of the voting stock of a concern, such minority holdings are equal or approximately
equal in size, and the aggregate of these minority holdings is large as compared with any other
stock holding, the presumption arises that each one of these persons individually controls or
has the power to control the concern; however, such presumption may be rebutted by a
showing that such control or power to control, in fact, does not exist.
(5) Affiliation arising under stock options, convertible debentures, and agreements to
merge. Stock options, convertible debentures, and agreements to merge (including agreements
in principle) are generally considered to have a present effect on the power to control the
concern. Therefore, in making a size determination, such options, debentures, and agreements
will generally be treated as though the rights held thereunder had been exercised. However,
neither an affiliate nor an applicant can use such options and debentures to appear to terminate
its control over another concern before it actually does so.
Example 1. If company B holds an option to purchase a controlling interest in company
A, who holds an attributable interest in a PCS application, the situation is treated as though
company B had exercised its rights and had become owner of a controlling interest in company
A. The gross revenues of company B must be taken into account in determining the size of the
applicant.
Example 2. If a large company, BigCo, holds 70% (70 of 100 outstanding shares) of
the voting stock of company A, who holds an attributable interest in a PCS application, and
gives a third party, SmallCo, an option to purchase 50 of the 70 shares owned by BigCo,
BigCo will be deemed to be an affiliate of company A, and thus the applicant, until SmallCo
actually exercises its option to purchase such shares. In order to prevent BigCo from
circumventing the intent of the rule which requires such options to be considered on a fully
diluted basis, the option is not considered to have present effect in this case.
Example 3. If company A has entered into an agreement to merge with company B in
the future, the situation is treated as though the merger has taken place.
(6) Affiliation under voting trusts.
(i) Stock interests held in trust shall be deemed controlled by any person who holds or
shares the power to vote such stock, to any person who has the sole power to sell such stock,
and to any person who has the right to revoke the trust at will or to replace the trustee at will.
(ii) If a trustee has a familial, personal or extra-trust business relationship to the grantor
or the beneficiary, the stock interests held in trust will be deemed controlled by the grantor or
beneficiary, as appropriate.
(iii) If the primary purpose of a voting trust, or similar agreement, is to separate voting
power from beneficial ownership of voting stock for the purpose of shifting control of or the
power to control a concern in order that such concern or another concern may meet the
Commission's size standards, such voting trust shall not be considered valid for this purpose
regardless of whether it is or is not recognized within the appropriate jurisdiction.
(7) Affiliation through common management. Affiliation generally arises where
officers, directors, or key employees serve as the majority or otherwise as the controlling
element of the board of directors and/or the management of another entity.
(8) Affiliation through common facilities. Affiliation generally arises where one
concern shares office space and/or employees and/or other facilities with another concern,
particularly where such concerns are in the same or related industry or field of operations, or
where such concerns were formerly affiliated, and through these sharing arrangements one
concern has control, or potential control, of the other concern.
(9) Affiliation through contractual relationships. Affiliation generally arises where one
concern is dependent upon another concern for contracts and business to such a degree that
one concern has control, or potential control, of the other concern.
(10) Affiliation under joint venture arrangements.
(i) A joint venture for size determination purposes is an association of concerns and/or
individuals, with interests in any degree or proportion, formed by contract, express or
implied, to engage in and carry out a single, specific business venture for joint profit for
which purpose they combine their efforts, property, money, skill and knowledge, but not on a
continuing or permanent basis for conducting business generally. The determination whether
an entity is a joint venture is based upon the facts of the business operation, regardless of how
the business operation may be designated by the parties involved. An agreement to share
profits/losses proportionate to each party's contribution to the business operation is a
significant factor in determining whether the business operation is a joint venture.
(ii) The parties to a joint venture are considered to be affiliated with each other.
(11) Exclusions from affiliation coverage.
(i) For purposes of § 24.709(a)(2) and paragraph (b)(2) of this section, Indian tribes or
Alaska Regional or Village Corporations organized pursuant to the Alaska Native Claims
Settlement Act (43 U.S.C. 1601, et seq.), or entities owned and controlled by such tribes or
corporations, are not considered affiliates of an applicant (or licensee) that is owned and
controlled by such tribes, corporations or entities, and that otherwise complies with the
requirements of § 24.709(b)(3) and (b)(5) or § 24.709(b)(4) and (b)(6), except that gross
revenues derived from gaming activities conducted by affiliated entities pursuant to the Indian
Gaming Regulatory Act ( 25 U.S.C. § 2701 et seq.) will be counted in determining such
applicant's (or licensee's) compliance with the financial requirements of § 24.709(a) and
paragraph (b) of this section, unless such applicant establishes that it will not receive a
substantial unfair competitive advantage because significant legal constraints restrict the
applicant's ability to access such gross revenues.
(ii) For purposes of § 24.709(a)(2) and paragraph (b)(2) of this section, an entity
controlled by members of minority groups is not considered an affiliate of an applicant (or
licensee) that qualify as a business owned by members of minority groups and/or women if
affiliation would arise solely from control of such entity by members of the applicant's (or
licensee's) control group who are members of minority groups. For purposes of this
subparagraph, the term minority-controlled entity shall mean, in the case of a corporation, an
entity in which 50.1 percent of the voting interests is owned by members of minority groups
or, in the case of a partnership, all of the general partners are members of minority groups or
entities controlled by members of minority groups; and, in all cases, one in which members of
minority groups have both de jure and de facto control of the entity.
(m) Publicly Traded Corporation with Widely Dispersed Voting Power. A publicly traded
corporation with widely dispersed voting power is a business entity organized under the laws
of the United States:
(1) Whose shares, debt, or other ownership interests are traded on an organized
securities exchange within the United States;
(2) In which no person
(i) Owns more than 15 percent of the equity; or
(ii) Possesses, directly or indirectly, through the ownership of voting securities,
by contract or otherwise, the power to control the election of more than 15 percent of the
members of the board of directors or other governing body of such publicly traded
corporation; and
(3) Over which no person other than the management and members of the board of
directors or other governing body of such publicly traded corporation, in their capacities as
such, has de facto control.
(4) The term person shall be defined as in section 13(d) of the Securities and Exchange
Act of 1934, as amended (15 U.S.C. § 78(m)), and shall also include investors that are
commonly controlled under the indicia of control set forth in the definition of affiliate in
paragraphs (l)(2) through (10) of this section.
(n) Qualifying Investor; Qualifying Minority and/or Woman Investor.
(1) A qualifying investor is a person who is (or holds an interest in) a member of the
applicant's (or licensee's) control group whose gross revenues and total assets, when
aggregated with those of all other attributable investors and affiliates, do not exceed the gross
revenues and total assets limits specified in § 24.709(a), or, in the case of an applicant (or
licensee) that is a small business, do not exceed the gross revenues limit specified in paragraph
(b) of this section.
(2) A qualifying minority and/or woman investor is a person who is a qualifying
investor under paragraph (n)(1), who is (or holds an interest in) a member of the applicant's
(or licensee's) control group and who is a member of a minority group or a woman and a
United States citizen.
(3) For purposes of assessing compliance with the minimum equity requirements of
§ 24.709(b)(5) and (6), where such equity interests are not held directly in the applicant,
interests held by qualifying investors and qualifying minority and/or woman investors shall be
determined by successive multiplication of the ownership percentages for each link in the
vertical ownership chain.
(o) Preexisting Entity; Existing Investor. A preexisting entity is an entity was operating and
earning revenues for at least two years prior to December 31, 1994. An existing investor is a
person or entity that was an owner of record of a preexisting entity's equity as of November
10, 1994, and any person or entity acquiring de minimis equity holdings in a preexisting entity
after that date.
Note: In applying the term existing investor to de minimis interests in preexisting
entities obtained or increased after November 10, 1994, the Commission will scrutinize any
significant restructuring of the preexisting entity that occurs after that date and will presume
that any change of equity that is five percent or less of the preexisting entity's total equity is de
minimis. The burden is on the applicant (or licensee) to demonstrate that changes that exceed
five percent are not significant.
5. Section 24.839 is amended by revising paragraphs (a) and (d) to read as follows:
§ 24.839 Transfer of control or assignment of license.
(a) Approval Required. Authorizations shall be transferred or assigned to another party,
voluntarily (for example, by contract) or involuntarily (for example, by death, bankruptcy or
legal disability), directly or indirectly or by transfer of control of any corporation holding such
authorization, only upon application and approval by the Commission. A transfer of control
or assignment of station authorization in the broadband Personal Communications Service is
also subject to §§ 24.711(c), 24.712(d), 24.713(b) (unjust enrichment) and 1.2111(a) of this
Chapter (reporting requirement).
* * * * *
(d) Restrictions on Assignments and Transfers of Licenses for Frequency Blocks C and F. No
assignment or transfer of control of a license for frequency Block C or frequency Block F will
be granted unless --
(1) The application for assignment or transfer of control is filed after five years from
the date of the initial license grant;
(2) The application for assignment or transfer of control is filed after three years from
the date of the initial license grant and the proposed assignee or transferee meets the eligibility
criteria set forth in § 24.709 at the time the application for assignment or transfer of control is
filed, or the proposed assignee or transferee holds other license(s) for frequency Blocks C and
F and, at the time of receipt of such license(s), met the eligibility criteria set forth in § 24.709;
* * * * *